Hungary Central Bank Sees Main Rate Staying at Record Low Longer

  • Monetary authority lowers inflation forecast for 2015 and 2016
  • New benchmark intended to spark local demand for state debt

Hungary’s central bank said it will probably keep borrowing costs at a record low longer than policy makers had expected as economic growth is set to slow and inflation pressure remains low.

The National Bank of Hungary on Tuesday set the three-month deposit rate at 1.35 percent, marking the first time policy makers used a new benchmark announced in June. That matches the level of the previous base rate, the two-week deposit facility, and is in line with the forecast of all 21 economists in a Bloomberg survey.

"The current level of the base rate and maintaining loose monetary conditions for an extended period, over a longer horizon than expected, are consistent with the medium-term achievement of the inflation target," the bank said in a statement on its website.

Central bank President Gyorgy Matolcsy vowed in July to keep borrowing costs at a record low for a “very long” period after having cut rates 29 times in three years. Economic growth slowed in the second quarter and consumer prices were unchanged in August from the year-ago period, buttressing the central bank’s guidance, according to Nora Szentivanyi, an economist at JPMorgan Chase & Co. in London.

“We expect the policy rate to remain at 1.35 percent for the foreseeable future, with risks tilted toward further policy easing,” Szentivanyi said in a report before the rate decision. “Additional easing could take the form of further policy rate cuts and/or a revamped” Funding for Growth plan, the central bank’s credit program to boost lending.

Zero Inflation

The forint has been resilient amid the monetary easing. It’s gained 1.7 percent against the euro this year as a current-account surplus, government and budget stability helped weather turmoil such as currency devaluations in China and other emerging-market economies. The forint traded 0.3 percent weaker at 311.25 per euro at 3:57 p.m. in Budapest.

The monetary authority now expects inflation to average zero this year versus 0.3 percent projected in June and 1.9 percent in 2016 compared with 2.4 percent earlier and the bank’s 3 percent medium-term target.

The country’s economy is slowing. Gross domestic product grew 2.7 percent in the second quarter from a year earlier after a 3.5 percent expansion in the previous three months. The central bank lowered its projection for 2015 growth to 3.2 percent from 3.3 percent earlier while keeping the 2016 forecast unchanged at 2.5 percent.

“The economy has started to lose some momentum; meanwhile the downside risks to the inflationary outlook have increased,” Mariann Trippon, a Budapest-based economist at Intesa Sanpaolo SpA’s CIB Bank unit, said in an e-mailed report before the decision. “Neither the recently released macroeconomic indicators nor recent market developments justify adjusting” the central bank’s policy stance.

The central bank in June announced a switch of benchmarks as it looks to encourage local banks to buy government debt and cut the nation’s reliance on foreign financing. As part of the move, it’s gradually limiting the amount of funds commercial lenders can keep in the two-week deposit facility.

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