MNB keeps interest rates on hold, to introduce two unconventional instruments from January 2018

On Tuesday, the Hungarian central bank kept its interest rates on hold at record low levels, consistent with expectations. He MNB stated that it will be prepared to further ease monetary conditions to drive borrowing costs lower. The central bank had lowered its overnight deposit rate by 10 basis points to -0.15 percent. Since then, the MNB has raised liquidity in forint markets through forex swap tenders.

According to the Monetary Policy Council’s assessment, the Hungarian economic growth will pick up over the forecast horizon. Some extent of unused capacity has stayed in the economy; however, it is expected to be gradually absorbed as output expands dynamically. The inflation target is likely to be attained in a sustainable manner by mid-2019.

Hungarian inflation in October decelerated to 2.2 percent, while the core rate came in at 2.7 percent. Both the headline and core rates are slightly below the central bank’s and market’s projections. The Council stated that the consumer price index is expected to decline again to the bottom of the tolerance band by the end of this year. Core inflation is also likely to fall in the second half of 2018 as the temporary effects related to changes in tobacco and dairy product prices wane. The central bank’s measures of underlying inflation are likely to be around 2 percent.

Meanwhile, the general rise in domestic demand is expected to continue to play a significant role in economic growth. Strong growth in construction and the expansion in the performance of the service sector are expected to continue in the months ahead. The nation’s current account surplus is likely to drop over the forecast horizon. Economic growth is also expected to be underpinned by the fiscal budget and the boosting effects on investment of EU funding. The Monetary Council anticipates that the Hungarian economy is expected to grow 3.6 percent for the whole of 2017. The economy is likely to grow at a stable pace of between 3 percent and 4 percent in the years ahead.

According to the Council, it is significant that the loose monetary conditions have their impact not only at the short but also at the longer end of the yield curve. To guarantee this, the Council has decided to introduce two unconventional instruments from January 2018.

“Accordingly, the Council will introduce unconditional interest rate swap (IRS) facilities with five and ten-year maturities, the allocation amount of which has been set at HUF 300 billion for the first quarter of 2018”, the statement read.

Moreover, the MNB will introduce a targeted program that will aim at buying mortgage bonds with maturities of three years or more. The decision on the operation details of the programs will be made in December 2017.

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