Hungarian Central Bank Holds Main Rate for Second Month

Hungary’s central bank kept its main interest rate unchanged at a record low for a second month, in line with its guidance for steady borrowing costs until the end of 2015 following two years of monetary easing.

The two-week deposit rate was left at 2.1 percent, the National Bank of Hungary said today, matching the forecasts of all but one of 20 economists surveyed by Bloomberg. The bank reiterated that it expects to keep “loose” monetary conditions for an “extended period,” according to a statement.

Policy makers reduced their benchmark rate with 24 consecutive rate cuts from 7 percent in 2012. Central bank President Gyorgy Matolcsy said in July that policy makers were hunkering down for a “sustained hold” until the end of next year, which he said was consistent with the goal of supporting an economic recovery while sticking to a medium-term inflation target of 3 percent.

“Today’s decision to keep rates on hold never seemed in doubt,” William Jackson, a London-based economist at Capital Economics Ltd., said in an e-mailed report. The bank will be “under little pressure to tighten policy.”

The forint traded 0.4 percent stronger at 310.97 per euro at 3:17 p.m. in Budapest. It has weakened 4.3 percent against the single currency this year.

New Forecasts

The central bank today raised its forecasts for inflation and growth for this year, according to a preview of its quarterly updated Inflation Report to be published on Sept. 25. The bank sees the average consumer-price index at 0.1 percent for the year compared with a June forecast of no change. It sees growth at 3.3 percent in 2014 versus 2.9 percent earlier.

For 2015, the central bank left its 2.5 percent average inflation-rate forecast unchanged and cut its gross-domestic-product forecast to 2.4 percent from 2.5 percent.

The central bank considered three alternate scenarios in addition to its baseline case, two of which call for policy tightening, according to the Monetary Council’s statement.

If the economic recovery among Hungary’s major trading partners is weaker than expected and leads to slower inflation, even looser monetary policy may allow policy makers to meet their price-growth target, it said. If major central banks tighten earlier than envisioned or domestic growth recovers faster, policy tightening may be called for in Hungary as well.

ECB Impact

The European Central Bank’s decision on Sept. 4 to unexpectedly cut its benchmark interest rate to 0.05 percent from 0.15 percent and its plan to start buying assets don’t alter forward guidance by Hungarian policy makers, non-executive Monetary Council member Csaba Kandracs told MTI state news service on Sept. 10.

For Poland, whose 2.5 percent benchmark rate is higher than Hungary’s, the ECB move may trigger a rate cut as soon as next month, according to three central bankers familiar with the discussions of the Monetary Policy Council. Polish central bank Governor Marek Belka said on Sept. 5 that rate cuts were “very probable.” Poland has kept its main rate unchanged since July of last year.

In Hungary, subdued inflation opened the way for Europe’s longest uninterrupted rate-cut cycle with the aim of boosting an economic recovery following a recession two years ago.

The consumer-price index was 0.2 percent in August. Government-mandated cuts on household energy costs have pushed headline price growth to a record low. The core inflation rate, which strips out volatile items including energy and food, was at 2.5 percent last month. Economic growth accelerated to 3.9 percent from a year earlier in the second quarter, the fastest in eight years, as car production surged.

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