Hungary Leaves Main Rate Unchanged in Shift From Benchmark

  • Central bank to start capping facility deposits from October
  • Significance of bank’s key instrument to decline, analysts say

Hungary’s central bank left its benchmark interest rate unchanged at a record low, in line with policy makers’ guidance to focus on unconventional tools for any future monetary easing.

The National Bank of Hungary kept the three-month deposit rate at 0.9 percent Tuesday, matching the estimates of all 19 economists in a Bloomberg survey. It also left the overnight loan and deposit rates unchanged at 1.15 percent and minus 0.05 percent.

“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 after the decision.

In a shift toward unconventional policy aimed at averting the need for more interest rate cuts, the monetary authority will accept deposits in its benchmark facility monthly instead of weekly starting in August and begin capping deposits in October. The shift is aimed at boosting lending by 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 President Marton Nagy said on July 12. He said the aim is to keep the benchmark rate stable to make the economic environment “predictable.”

Effective Rate

“The benchmark rate’s significance will diminish in the coming months because there won’t be unlimited access to it from October, which will allow the central bank to reduce the effective interest-rate level without cutting the benchmark rate,” Takarekbank Zrt. economists, led by Andras Oszlay, said in an e-mail.

The forint has strengthened 0.6 percent against the euro this year and traded at 313.51 per euro at 3:37 p.m. in Budapest. The yield on the 10-year Hungarian government bond touched a record low 2.8 percent on July 14 and rose to 2.89 percent on Tuesday.

The central bank is working in concert with the government to boost economic growth after gross domestic product unexpectedly contracted in the first quarter from the previous three months.

The second-quarter expansion may exceed 2 percent and may accelerate further in the second half of the year, central bank Managing Director Barnabas Virag told Magyar Hirlap newspaper in an interview published on Monday. Consumer prices dropped 0.2 percent in June. Policy makers target 3 percent inflation in the medium term.

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