Hungary central bank may keep base rate on hold for an extended period - Deputy Governor

Prudence, patience and determination

Deputy Governor Csaba Kandrács, who has taken over today's background discussion from Barnabás Virág today for he has travelled to Washington, said the only move on the table of the Monetary Council today was the no change decision.

A spirit of prudence, patience and determination characterised the meeting

said Kandrács. Everyone agreed that the sustainable achievement of the inflation target is the central bank's goal.

In July, the MNB entered a new phase, deciding that from then on, decisions would be made in a data-driven mode, on a meeting-by-meeting basis. In August, this meant a pause, and in September the interest rate was cut by 25 basis points. Since the September rate decision, we have seen deteriorating investor sentiment, pressure has increased in emerging markets, expectations on the Federal Reserve's interest rate path have shifted upwards, domestic yield spreads have also risen and the forint has weakened.

The Council met in a generally deteriorating environment, but the good and positive news is that inflation reached its target in September 2024, returning to the central bank level after four years. The structure of inflation is also worth looking at: core inflation has risen and inflation risks have increased.

MNB rationale

"The intensification of geopolitical conflicts has led to rises in energy prices and emerging market risk premia. As a result of these two effects, upside risks to inflation have increased," Hungary's central bank (MNB) has said in the rationale of its on-hold rate decision made on Tuesday. 

"In the [Monetary] Council’s assessment, re-intensifying geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant a pause in cutting interest rates."

MNB to support financial market stability with other instruments at the end of the year

The financial market environment has become more fragile, and maintaining stability is of key importance, said Kandrács.

The base rate was kept unchanged at 6.50% today in accordance with the stability-oriented approach.

We cannot sit back: a careful and patient monetary policy is warranted in the current environment,

he said.

If warranted by the external environment and the inflation outlook, the base rate may remain at the current level for an extended period, causing an increase in our relative interest spread,

added Kandrács.

At the end of the year, the MNB stands ready to smooth movements in financial markets with swap tenders, discount bond auctions and longer-term instruments.

The Monetary Council continues to make decisions in a data-driven manner, from month to month.

External environment changed

Kandrács repeatedly cited geopolitical conflicts as the driving force behind the significant increase in commodity prices, which worsens the inflation outlook. He also noted that expectations for the Federal Reserve's interest rate path have shifted upward, and that comestic yield spreads have also risen, while the forint has depreciated.

There are two seats left for the Fed. There is a divergence between the ECB and the Fed, which was not the case in September. In Central and Eastern Europe, currencies have depreciated in recent weeks.

EUR/HUF at 400 has not brought any substantial change in the behaviour of economic operators

The behaviour of economic operators has not changed substantially since EUR/HUF breached 400, the Deputy Governor said, adding that the central bank is constantly monitoring the situation.

Inflation developments - We cannot sit back

The structure of inflation needs to be watched, and inflation expectations have also strengthened. This tells the MNB that it should not sit back, it should be more cautious and patient. Inflation expectations also need to be influenced in a meaningful way. They have not declined, this also told us that holding is the only real option, said Kandrács.

He added that the current account turned into surplus again in August, which is also a positive turnaround.

Stabilising inflation expectations is important

Global risks have also emerged in financial markets. The ECB cut its policy rate in October, while the Fed may cut it less than expected. Caution is very important.

Due to experiences with high inflation, households remain cautious.

Inflation has a long shadow,

said Kandrács, adding that inflation expectations are more volatile than usual and rose slightly.

"Price stability and the maintenance of financial market stability are the most effective ways to contribute to the relaunch of economic growth."

Forward guidance

Kandrács reiterated that the central bank stands ready to smooth movements in financial markets by using instruments with longer maturities in December, in addition to one-day FX swap tenders announced on a daily basis and weekly discount bill auctions.

He said that the commitment remains. Achieving and maintaining price stability, maintaining financial stability are the two most important, and everything comes after that.

The central bank's attitude has not changed: it continues to operate in a data-driven manner, with a particular focus on country risk perceptions. The central bank decides on a month-to-month basis, but the Deputy Governor said:

We are not at all afraid of maintaining the current interest rate level for a longer period of time.

What if forward guidance is not enough?

Asked what the MNB can do if financial market stability is not restored despite the strict forward guidance, Csaba Kandrács replied that the central bank does not see the need to take further steps at this time.

At this stage, the MNB's assessment is that if the trends we are seeing continue, no further intervention is warranted.

They believe that keeping interest rates at their current level for a long period of time may be sufficient. In response to another similar question, he said that they are monitoring the situation.

Will do what needs to be done at the time

Asked whether there could be an interest rate hike in the future, Csaba Kandrács said that he would only repeat his earlier message: he did not want to speculate for the moment, but it was now considered that holding was the only option.

If we have to be here for a longer period of time, the interest rate will stay at this level for a longer period of time, but we always have to take into account the current developments.

We will always make the right decision,

said Kandrács.

Cover photo (for illustration purposes only): Getty Images