Hungary Can Hold Main Rate Into 2019, Central Banker Says

  • Hungary to have negative real interest rates for extended time
  • Nagy's comments go beyond central bank guidance of Oct. 20

Hungary’s central bank can keep its benchmark interest rate at a record low into 2019 and will take advantage of below-inflation borrowing costs to boost lending and economic growth, National Bank of Hungary Vice President Marton Nagy said.

Nagy drew up a rate trajectory beyond the central bank’s guidance issued last week, when policy makers said the benchmark may stay at 1.35 percent until the end of the forecast monetary horizon in 2017 as the economy slows and inflationary pressures remain subdued. The forint dropped to the weakest in three weeks.

“We can keep the benchmark interest rate at this level in 2018 and 2019,” Nagy told reporters in Budapest on Tuesday. “That’s important because we’re not just talking about keeping the rate steady on the monetary-policy horizon, but beyond.”

Hungary’s growth is set to go from the fastest among the European Union’s five largest eastern economies to the slowest this year as European Union funding drops and corporate lending remains subdued, according to estimates compiled by Bloomberg.

Forint Drops

The forint weakened 0.2 percent to 312.24 against the euro as of 3:38 p.m. in Budapest, the weakest since Oct. 8. Forward-rate agreements used to wager on three-month interest rates in six months were down one basis-point to 1.22 percent, showing bets for 13 basis points in rate reductions over the next half year.

Hungary should get used to an environment of negative real interest rates for an “extended period” as inflation rebounds, Nagy said. While the central bank is seeking to help boost growth, its 3 percent inflation target remains the priority. The National Bank of Hungary left the benchmark rate unchanged for a third month on Oct. 20. Consumer prices fell in September for an eighth month in the past year.

“Negative real interest rates are not just an opportunity, but something that must be taken advantage of,” Nagy said. He said this wouldn’t jeopardize the central bank’s inflation goal.

Lending Plan

The central bank will present a set of measures aimed at boosting lending on Nov. 3, Nagy said. The steps were coordinated with banks and will include the phasing out of the Funding for Growth plan, he said. The program channeled free funding to lenders, who in turn had to extend them to small- and medium-sized companies at interest rates below 2.5 percent.

As part of efforts to complement corporate-financing channels, the central bank is looking to shore up the Budapest Stock Exchange, Nagy said at a conference in Budapest earlier Tuesday.

The central bank will complete of a majority stake in the bourse held by Austrian companies “in a week or two,” he said. Austria’s CEESEG owns 50.5 percent, Oesterreichische Kontrollbank has 18.3 percent and the central bank controls 6.9 percent. The aim is to boost listings including by state-owned companies and to provide a fresh financing source, Nagy said.

The government, meanwhile, may consider industry-specific cuts to the 27 percent general value-added tax rate, the highest in the EU, Economy Minister Mihaly Varga told the same conference.

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