Hungary Holds Main Interest Rate With New Easing Tools in Focus

  • Rate setters seek to buttress economy as growth set to slow
  • Policy indirectly encouraging forint weakness, RBS says

Hungarian policy makers left borrowing costs unchanged at a record low after the central bank signaled it would rely on different policy tools to ease monetary conditions and ward off an economic slowdown.

The National Bank of Hungary kept the three-month deposit rate at 1.35 percent on Tuesday for a fourth month, in line with the forecast of all 19 economists in a Bloomberg survey. The central bank will publish a statement explaining the decision at 3 p.m. in Budapest.

Hungary’s monetary authority, which has vowed to hold rates beyond the end of next year, this month pledged to expand the use of interest-rate swaps and deploy one or two other tools to prop up a slowing economy. Rate setters will probably present further unconventional measures while reiterating their commitment to unchanged borrowing costs, according to the Royal Bank of Scotland Plc.

"We remain of the view that the central bank is indirectly encouraging currency weakness via its quasi QE programs and the extended forward guidance in a bid to support slowing growth," Gabor Ambrus, a London-based economist at RBS, said in an e-mail before the rate decision.

The forint has gained 1.1 percent against the euro since the end of June, the fifth-strongest performance among 24 emerging-market currencies tracked by Bloomberg. It traded less than 0.1 percent stronger at 311.86 per euro at 12:35 p.m. in Budapest.

Record Rates

Central bank President Gyorgy Matolcsy pledged in July to keep borrowing costs at a record low for a “very long” period after having cut rates 29 times in three years.
Hungary’s central bank will shift its focus from the benchmark rate to non-conventional tools, as the latter are much more efficient and can be better targeted, Vice President Marton Nagy said on Nov. 4. The benchmark rate may stay at a record low into 2019, Nagy said last month.

Inflation remains below the bank’s medium-term inflation target of 3 percent even as the effect of 2014 energy tariff cuts fade from the data. Prices rose 0.1 percent in October from a year earlier on higher food costs. Rate-setters expect prices to stay little changed on an annual basis this year and to grow by 1.9 percent in 2016.

Economic growth slowed 2.3 percent in the third quarter from a year earlier after 2.7 percent in the previous three months. The pace of expansion will slow to 2.9 percent this year from 3.6 percent in 2014, according to the European Commission. That would put Hungary behind the Czech Republic, Poland, Slovakia and Romania after recording the fastest growth among the European Union’s five largest eastern economies last year.

As part of its effort to stoke growth, the bank announced the Growth Supporting Program, which will reduce supervisory capital requirements next year for banks that step up lending. The bank will also assume part of the risk on some loans via interest-rate swaps and will introduce a preferential deposit facility for qualifying banks as it aims to increase credit to smaller companies by as much as 10 percent next year.

Before it's here, it's on the Bloomberg Terminal.