BUDAPEST: The National Bank of Hungary‘s Monetary Council decided to keep the central bank’s key rate on hold at 0.90 percent at a meeting on Tuesday, as expected. The council has left the base rate on hold since signalling an end to an easing cycle at a policy meeting at the end of May 2016.
However, the rate-setters have made use of “unconventional, targeted” instruments to ease monetary policy further, such as placing a limit on the central bank’s main instrument for sterilising liquidity, introducing EUR/HUF swaps to provide forint liquidity as well as modifying the interest rate corridor, a band around the base rate that prevents extreme fluctuations of interbank rates. The rate-setters left other central bank rates, too. The interest rate corridor stayed unchanged, with the O/N collateralised loan rate at 0.90 percent and the O/N central bank deposit rate at -0.05 percent. The rate of the one-week collateralised central bank credit stayed at 0.90 percent. In a statement released shortly after the meeting, the council said that the 3 percent inflation target is expected to be reached sustainably from the beginning of 2019, repeating the forecast made in the NBH’s latest Inflation Report released a month earlier. Some degree of unused capacity has remained in the economy, but this is likely to be absorbed gradually as output grows dynamically, the statement said. Otherwise the council repeated its earlier stand on keeping the base rate on hold “for an extended period”, while staying prepared to ease monetary conditions with unconventional instruments. “If the assumptions underlying the [NBH]’s projections hold, maintaining the current level of the base rate and loose monetary conditions achieved through the change in monetary policy instruments for an extended period is consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy” according to the statement.
In the council’s assessment, the external environment continues to pose a downside risk to inflation, the rate-setters said, then repeated their earlier stand that “if inflation remains persistently below the target, the council will stand ready to ease monetary conditions further using unconventional, targeted instruments.”