NBH to hold bank rate for extended period

Hungary kept its base rate on hold, at 1.35%, as expected. Last month, the NBH announce a final cut in the cycle and gave explicit written guidance that it expected to keep on hold for an extended period, until inflation approached the 3% target. Conditions have weakened since last month. Inflation stepped back to +0.4% y/y. GDP growth in Q2 15 decelerated. 

The NBH shrugged off these developments, claiming the growth slowdown was due to one-off factors and would rebound. The NBH views the inflation decline as reflecting lower global commodity prices and expects core inflation to gradually begin to increase as the economy grows further and uses up spare capacity. It predicts this process will be fully operative by the end of the forecast period (2017). This could prove to be too optimistic and the NBH may pursue further measures to loosen monetary conditions in the next quarters, says Barclays.