The Central Bank of Hungary MNB has announced that its key lending rate remained at a record low of 0.9 percent, in line with expectations, but has increased its overnight deposit rate by 10 basis points from -0.15 percent to -0.05 percent.
This action reflects the first monetary tightening measure of the MNB after a relaxation cycle that began in February 2012.
The MNB had lowered its base rate to the current level in May 2016. Since March 2016, it has also maintained a negative rate for overnight deposits. This was lowered to -0.15 percent in September 2017, the new rate of -0.05 percent comes into effect on March 27.
Hungarian inflation rate stood at 3.1 percent year-on-year in February with a core-inflation of 3.5 percent, exceeding the MNB-supported 3 percent threshold.
MNB governor Gyorgy Matolcsy said at a press conference the rise in the overnight deposit rate was an “important but sufficient step”, cooling down expectations on speedy hikes of the base rate.
However, as an additional measure, the head of the MNB also announced the reduction of cash in the forint: “We have also decided to reduce by 100 billion forints, from 400-600 billion to 300-500 billion the amount of cash in the forint liquidity swaps.” he added.
The reduction in liquidity swaps can allow the reduction of the inflation rate according to the online journal Index.
“In our opinion, a cautious central bank approach leaves the way ahead of future macro-data-based decisions and continues to go further with the minimum necessary tightening,” Sandor Jobbagy, analyst of CIB Bank declared after the MNB decision.
“Considering domestic core inflation and the external environment, this may even mean that there will be no further interest rate hikes this year. However, the definition of liquidity frameworks allows for further fine-tuning by changing the swap stock,” Jobbagy added.
This suggests the maintenance of the base rate as long as inflation remains within acceptable margins to MNB.
“We have achieved our goals in the last few years in terms of inflation, now it’s time to preserve them,” Matolcsy concluded.
Hungarian growth reached 5 percent year-on-year in the fourth quarter and 4.8 percent for the full year of 2018. While the economy will remain dynamic, a gradual slowdown in growth is expected in 2019, especially when taking into account a slowdown in Germany, Hungary’s largest export market.