Hungary Leaves Rates at Record Low Amid Unconventional Push

  • Central bank to start capping benchmark deposits from October
  • Inter-bank borrowing costs have dropped below benchmark rate

Hungary’s central bank left its benchmark interest rate unchanged at a record low as policy makers prepare to harness unconventional measures following a third month of declining consumer prices.

The National Bank of Hungary kept the three-month deposit rate at 0.9 percent Tuesday, matching the estimate of all 18 economists in a Bloomberg survey. It also left its overnight loan and deposit rates unchanged at 1.15 percent and minus 0.05 percent, respectively.

“The current level of the base rate and maintaining loose monetary conditions for an extended period are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy,”’ the rate-setting Monetary Council said in a statement published on the central bank’s website.

With consumer prices falling, Hungarian central bankers are ramping up unconventional easing to avert having to further lower the benchmark rate, which they’ve said they want to keep unchanged for a sustained period. The monetary authority is accepting deposits in its benchmark facility once a month starting now in August, instead of weekly, and will begin capping deposits in October.

On Hold

“The central bank is unlikely to cut interest rates until it sees how the benchmark deposit cap works in practice and how money markets react to it,” Gergely Urmossy a Budapest-based economist for Erste Group Bank AG, said in an e-mail. “The main rate may stay at 0.9 percent until year-end and maybe throughout next year if the new facility works.”

The forint, 1.1 percent stronger against the euro in the past month, was at 310.15 per euro by 3:06 p.m. in Budapest, the biggest increase among 24 emerging-market currencies after the South African rand, the Turkish lira and the Polish zloty. The yield on the 10-year Hungarian government bond was 2.86 percent, up from a record-low 2.78 percent Aug. 12.

Three-month interest rates on the Budapest inter-bank market, known as BUBOR, dropped below the benchmark rate on Aug. 10 and stood at 0.86 percent on Tuesday. Interest-rate levels on most contracts in Hungary are tied to the BUBOR. The central bank will hold its monthly tender for its benchmark facility on Wednesday and will announce the cap in September.

The change is aimed at reducing borrowing costs on the inter-bank market or cutting government bond yields by channeling commercial-bank liquidity into the debt market, central bank Vice Governor Marton Nagy said on July 12.

Consumer prices fell 0.3 percent in July from a year ago, dropping for a third consecutive month. Policy makers target 3 percent inflation in the medium term.

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