Hungary: MPC not to rush with monetary easing yet

• Next MPC meeting: Mar 28, 2023
• Current policy rate: 13.00%
• EmergingMarketWatch forecast: Hold
• Rationale: MPC says to keep base rate unchanged for prolonged period of time

We expect that the MPC will keep the base rate unchanged on its next rate-setting meeting at the end of March. The MPC maintained the base rate at 13.0% on its last meeting on Feb 28. The monetary policy guidance from the meeting sounded somewhat conflicting but the key takeaway should be that any loosening of monetary policy might not start soon and we would not expect it to happen in March. The guidance statement made a subtle change in its wording, saying that the base rate should be kept unchanged for a prolonged period of time as opposed to the previous guidance from January that the tight monetary conditions will be kept unchanged for a prolonged period. We think that the change could mean that the MPC might be getting ready to start unwinding the extraordinary monetary tightening, implemented through the one-day deposit rate of 18.0% as of mid-October. The statement could be thus considered to contain a dovish note but at the same time, the MPC announced a restructuring of the reserve requirement system, which represented a de-facto tightening. The reserve requirement change represented hiking the remuneration of the optional port on required reserves from the base rate to the higher, one-day deposit rate in order to encourage banks to hold higher reserves.

From another point of view, the change suggests that the MPC is unlikely to consider merging the one-day deposit rate with the policy rate in the near future, otherwise the restructuring of the reserve requirement would not make much sense. Accordingly, we consider it highly unlikely that the one-day deposit rate could be brought down to the level of the policy rate in March. Some gradual unwinding of the tightening could take place with some cautious cut in the one-day deposit rate in March but our baseline scenario is still for the MPC to keep the two rates on hold at least till April. Our expectations are also based on the conditions for the prospective loosening of monetary policy. NBH deputy governor Barnabas Virag signalled after the February rate-setting meeting that these conditions included the inflation outlook, the development of energy prices, the interest policy of global central banks, the sustainability of the narrowing of the current account deficit as well as the EU fund developments. The inflation outlook still warranted caution because of elevated service inflation, Virag said, while noting favourable developments regarding energy prices and the current account. On the other hand, the NBH expected global central banks to continue tightening their monetary policy and we also believe that the EU fund conflict is not likely to be resolved by the end of March. Market uncertainty regarding the EU fund inflows might thus prevent the NBH to abstain from starting the loosening too soon, i.e. in March, despite the recent significant strengthening of the forint exchange rate, in our view.

The mandates of two external MPC members expire in the near future - Bianka Parragh on Mar 23 and Gyorgy Kocziszky on Apr 6. The MPC is therefore likely to be in reduced form for its next rate-setting meeting on Mar 28 since the parliament is unlikely to appoint a replacement for Parragh in the remaining time. According to media speculation, Parragh will be replaced by CEO of state-owned loan guarantee vehicle Garantiqa Hitelgarancia Dr. Eva Buza. Little known businessman Zoltan Kovacs will be allegedly the successor of Kocziszky on the MPC. The reshuffle is viewed with increased attention because of the recently aggravated conflict between the government and NBH governor Gyorgy Matolcsy. We note that Bianka Parragh might be generally considered to be closer to the government than to Matolcsy but she has nonetheless always voted in line with the other MPC members. This could be the reason why she is not expected to be re-appointed for another mandate and we do not rule out that the prospective appointments of Buza and Kovacs on the MPC might indeed increase the government influence on the MPC. We still doubt that it will be sufficient to overturn the MPC policy course, given the majority of the remaining members. If this is the case, Matolcsy is likely to maintain his dominant say in monetary policy matters until the end of his term in Mar 2025.