Hungary central bank keeps rates on hold
Analysts polled by Portfolio all agreed that the MNB will not change rates at this meeting. In fact, they believe that the central bank will not even resume interest rate cuts this year.
The MNB did not cut the base rate at its last meeting either, with the last 25-basis-point reduction delivered in September. Deputy Governor Barnabás Virág said at the time that a 25 basis point cut or a hold decision would be on the agenda at the following meeting, but due to the developments in the financial markets,
the MNB has not lowered the base rate since then.
At a post-meeting press conference, Deputy Governor Csaba Kandrács said last month that the central bank may keep interest rates at this level for a long time if it deems it necessary, but no other move was planned. He said this approach is aimed at maintaining the forint's interest rate premium against the dollar.
We know from previous messages from the central bank that it takes several factors into account in its decisions. These are:
- inflationary developments,
- the decisions of the major central banks,
- the evolution of risk perceptions,
- developments in consumer and business confidence.
Inflation in the autumn was below expectations, with the October figure (3.2% yr/yr) also surprising on the downside. Analysts surveyed by Portfolio projected inflation to pick up to 3.5% from 3% in September, i.e. the acceleration was much smaller than expected.
Inflationary pressures were also mild on a monthly basis, and this was not the first surprise on the downside, so the deceleration of inflation would have allowed for a rate cut on its own.
Real economic performance would have also warranted easing. GDP surprisingly fell by 0.7% q/q in the third quarter, putting Hungary into a technical recession. Industry is underperforming, investment is doing poorly, and the continuation of monetary easing could have a positive impact on the economy.
But the MNB cannot lower interest rates because of the weak forint, as this would reduce the forint's interest rate premium, although analysts say that the current interest rate level is no longer attractive enough to keep short sellers out of the forint market.
The HUF weakened to over 412 against the euro after the US presidential election, and although EUR/HUF has been at 404 since then, the rate is mostly around 408-410. The weak forint is eroding the confidence of economic agents and increasing inflation concerns, which is why the MNB is interested in a stable forint exchange rate. The vulnerability of the forint is itself such an important factor that it alone makes it impossible to cut interest rates, presumably even at the next meetings.
There has been no positive turnaround in expectations for the major central banks, the US economy remains strong, the Fed is not expected to be in a hurry to cut rates, and US interest rate expectations are not dissipating. Thus, the premium of the forint interest rate over the dollar, mentioned several times above, can only be maintained if the forint rate remains at its level.
The MNB will publish a statement on today's decision at 3 pm, at which time Barnabás Virág, the MNB's Deputy Governor for Monetary Policy, will also hold a background discussion, which Portfolio will cover live.
Cover image (for illustration purposes only): Getty Images
