Hungary: MPC sees keeping policy rate unchanged for prolonged time as sufficient
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
The MPC is likely to keep the base rate unchanged at 13.0% on its next rate-setting meetings in January. The MPC had decided to end the rate hike cycle in September, saying that the current rate ensured a forward-looking real interest rate and that inflation risks have become balanced over the monetary policy horizon. The monetary policy guidance from the subsequent rate meetings in Oct-Dec suggested that the MPC does not plan to resume the rate hike cycle in the short term, especially after the introduction of the emergency monetary tightening measures in mid-October. These measures included the introduction of a overnight deposit instrument with an interest rate of 18%, 5pps higher than the policy rate. In addition, the NBH also rolled out an overnight forex liquidity swap and committed to directly meeting the forex needs of energy importers. These were estimated at EUR 1.2-1.5bn per month till the end of the year but the NBH has not provided specific data as yet.
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The MPC has maintained in Oct-Dec that the current level of the policy rate was adequate to address the inflationary risks and was supportive of price stability if it was maintained for a prolonged period of time. We do not expect the MPC to react to the elevated inflation outlook resulting from the government decision to remove the fuel price cap as of the beginning of December as the MPC was in full agreement that a disinflation trend will start as of H1/2023 and inflation will fall to the single digits by the end of 2023, returning to the 1pp tolerance band around the target in 2024. The minutes from the December meeting suggested that some more hawkish MPC members believed that a tighter bias to monetary policy might be necessary because of the risk for emerging markets coming from the monetary tightening by global central banks. These voices appeared to be in minority while the broad MPC view was that keeping the current policy rate unchanged for a prolonged period of time was sufficient for the sake of price stability.
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The release of the new updated inflation and macroeconomic forecasts with the Q4 Inflation Report did not change the monetary policy stance of the NBH either. The NBH significantly raised the inflation outlook for 2023 but maintained that the policy rate was adequate for the sake of price stability if it is maintained for a prolonged period of time. Monetary policy will continue based on three pillars - keeping the base rate, continuing the policy of restricting forint liquidity and flexible use of the emergency monetary tools, NBH deputy governor Barnabas Virag said on a press conference after the December meeting. He added that the NBH will be patient in deciding when to phase out the 18.0% overnight deposit instrument, waiting for a sustained improvement in risk perceptions. In this context, the MPC guidance has also suggested that financial stability has become the MPC's primary focus and the MPC emphasised that financial stability was also important for achieving price stability, which we see mostly as a sign for aversion towards potential further depreciation of the forint exchange rate.
Virag had earlier indicated that the NBH monitored six factors important for the assessment of risk perceptions - changes in the external environment, the Russia-Ukraine war, the European energy crisis, tightening by major global central banks, the current account balance and the negotiations on EU funds. Out of these factors, we believe that global central bank tightening and the EU fund conflict would be one of the most important and in this respect, the lack of complete resolution of the EU fund conflict should mean that the NBH will likely keep the extraordinary monetary tightening in the next months. Virag specifically welcomed the favourable developments regarding the EU fund agreement and the current account balance but implicitly confirmed our expectations, saying that these were not sufficient for a sustained turnaround in risk perceptions. He also suggested that the NBH will continue the practice of selling forex directly to energy importers for the sake of reducing forex demand on the market and reducing the downward pressure on the forint exchange rate.