Hungary central bank keeps rates on hold
All analysts polled by Portfolio expected the base rate to remain at 6.5% in October. After the Deputy Governor's remarks at a Portfolio conference last Thursday, a different decision would have come as a big surprise.
The MNB started lowering the base rate two years ago, and the reduction has been constant until this summer, when further easing became uncertain, and in July the MNB announced a new phase. They said that from then on, they will decide on a month-by-month basis, and that a pause between rate cuts could occur at any time.
At the July meeting, however, the MNB took advantage of the favourable market environment to lower rates, followed by a pause in August and another cut in September.
And in October we have another on-hold decision, which this time may not be just for a month.
The central bank takes several factors into account in its decisions. The obvious consideration is inflation, which has been better than expected in recent months, reaching the central bank's target in September.
While inflation may rise in the coming months due to the base effect, we see inflationary pressures in Hungary remaining broadly lower than expected.
In addition, the other aspect considered by the central bank, household and business confidence, is not doing well. Investment remains weak and consumption is picking up, but not enough. These two aspects would therefore allow for an interest rate cut.
However, the other two interrelated aspects prevented the MNB from lowering interest rates.
The actions of the major foreign central banks (or, more precisely, the expectations of such actions) and the evolution of risk perceptions have not allowed interest rate cuts to continue.
Investors expect that the Federal Reserve will not cut rates rapidly, which has lowered the expected interest rate premium on emerging currencies. There is also general uncertainty over the US presidential election and the feeble economic performance in Europe.
As a consequence, the forint has depreciated to over 400 against the euro, and a weak forint poses risks to inflation and may also have a knock-on effect on household and business confidence.
The MNB is therefore interested in a stable exchange rate, so it was not surprising that MNB Deputy Governor Barnabás Virág made several verbal interventions in the previous weeks. He announced at a Portfolio conference last week that interest rates could remain unchanged for a while, so today's decision was a foregone conclusion.
Virág's words could only temporarily reverse the weakening, as the forint eased again to around 402 against the euro on Monday. It will therefore be worth watching the announcement at 3pm and the press conference of Deputy Governor Csaba Kandrács, which will start at the same time and will be covered live.
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