Hungary cenbank may keep rates on hold not just in October - Deputy Governor
The recent period of rapid disinflation has brought inflation close to the central bank's targets. Inflation in Hungary has been in line with the regional average this year, said Barnabás Virág, Deputy Governor of the National Bank of Hungary (MNB), at the Portfolio Budapest Economic Forum 2024 conference. The title of his presentation was "Will interest rates get even lower? Monetary policy plans".
He pointed out that the global market environment is less risk-friendly than before.
The US economy is in good shape, which on the monetary side means that the US could be on a cautious path of interest rate cuts, as currently expected. Virág pointed out that central bank balance sheets grew significantly after Covid, but in recent years these balance sheets have started to shrink.
The big question is how this tightening of liquidity, if it continues, will affect equity markets, government security yields and emerging market capital flows, said Virág. So far, the quantitive tightening has only caused temporary ripples, he added.
He said that an important question is how long yields will develop in the world. At the moment we are seeing an inverted yield curve in the major markets around the world. It is still not a normal external environment, but we are slowly moving back to a normal world where long yields are higher.
What this means for Hungary is that our risk premiums have increased this decade compared to the second half of 2010. Our risk premium is about 140 basis points higher compared to the second half of 2010.
the deputy governor said hungary can keep long yields lower if inflation is kept low for a long time.
Investors are also watching the budget deficit and current account developments. According to Barnabás Virág, if the budget deficit target is reached this year, the primary balance could be positive, which would be a favourable development.
In his view, the first lesson is that inflation casts a long shadow. The fear of inflation is still in people's minds, influencing corporate and household decisions. These fears need to be addressed by moving to a sustained low inflation environment.
The second lesson is that the structure of inflation has changed. Services inflation has remained persistently higher, at two and a half times the EU average and more like three times the average in Hungary. According to Barnabás Virág, consumer habits have changed, as demand has shifted towards services and away from consumer durables.
The third lesson is that uncertainty is high even in developed markets. In many cases, the dominant narrative - as far as the US is concerned - can be changed by a single piece of data, which means there is considerable uncertainty.
The fourth lesson is that geopolitics is emerging as a dominant factor. Geopolitics has emerged as a sector affecting trade policy. And this has a major impact on commodity prices.
The fifth factor is the issue of euroisation. When the forint exchange rate has shifted more, the demand for euro savings has increased. There is still a latent euroisation threat in Hungary. All savers and investors should be motivated to save in forints, he added.
The final lesson is that the transmission process of the central bank has been transformed. The exchange rate channel has become more powerful. The effects of the exchange rate shift are quickly reflected in consumer prices, while competitiveness effects have been reduced. In the case of retail lending, monetary transmission works, but in corporate lending, the dominant influence seems to be the demand outlook rather than interest rates. At the same time, the expectation channel has been strengthened, which dominantly influences savings, borrowing and investment decisions.
Virág said:
- Inflation fell to the central bank's target in September, but core inflation rose to 4.8%, while upside risks to inflation intensified.
- Risk aversion towards emerging markets is increasing as expectations for the Federal Reserve's end-of-year interest rate move higher. The expected interest rate paths of the major global central banks are characterised by divergence.
- Geopolitical conflicts have escalated and the risks associated with them have increased.
- The impact of FX market movements is asymmetric: in the current environment, the costs are greater than the perceived benefits.
From next year, the balance sheet-tightening monetary trend will be compounded by the phasing out of previous programmes.
Overall, the Deputy Governor of the central bank believes that:
- Since the end of September, the decision space has changed on several fronts: the geopolitical environment and the shift in US interest rate expectations are once again creating a "headwind period" for emerging markets. These two effects reinforce upside inflation risks
- Achieving a sustainable inflation target and preserving financial market stability are key. This requires continued patient, tight, stability-oriented monetary policy.
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The MNB may pause interest rate cuts not only in October.
If warranted by the external environment and the inflation outlook, the base rate could remain at the current level for an extended period, causing Hungary's relative interest rate premium to rise. - In addition to a tight interest rate policy, the shrinking central bank balance sheet will also have an impact on the tightening of monetary conditions from 2025, he concluded.
The forint appreciated significantly after Barnabás Virág's comments, as the Deputy Governor hinted that the MNB may cut interest rates less and that higher interest rates will support the forint.
Cover photo: Portfolio
