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Hungary Sticks to Rate Course After Reining in Forint, Bonds

Updated on
  • Central bank keeps record-low rates, matching estimates
  • Bank of America sees dovish policy eroding support for forint

Hungary’s central bank left its policy unchanged after currency and bond markets emerged from a period of upheaval around the introduction of fresh unconventional measures in January.

Policy makers kept the three-month deposit interest rate at a record-low 0.9 percent and left the overnight deposit rate at minus 0.15 percent Tuesday, matching the estimates of all economists in Bloomberg surveys. With the forint trailing regional peers and debt yields stabilizing, rate setters reiterated their dovish stance in a statement following the meeting. The approach, led by unconventional measures, is increasingly at odds with a shift toward monetary tightening across most of Europe.

As inflation in Hungary remains subdued, policy makers are increasingly targeting market measures with new interest-rate swap operations and mortgage-note purchases started last month. While the launch of swap tenders brought a period of volatility as investors initially doubted that the size of the program would be sufficient, bond markets have since steadied at lower levels and the forint has shrugged off appreciation pressure.

"Maintaining the base rate and the loose monetary conditions at both the short and long ends for an extended period is necessary to achieve the inflation target in a sustainable manner," rate setters said in the statement. The central bank said it would assess its success in keeping long-term rates lower by looking at yields relative to international peers.

Gyorgy Matolcsy

Photographer: Justin Chin/Bloomberg

Unconventional Measures

After shifting back to a dovish bias last August, Hungary also cut overnight rates deeper below zero and has tried to convince markets that continued easing is appropriate. In contrast, the Czech Republic and Romania have raised rates several times and the European Central Bank has halved its asset purchases.

Speaking in an interview earlier this month, Deputy Governor Marton Nagy pledged to keep interbank rates near zero until as late as the end of next year, with the benchmark on hold until the end of 2020. On Tuesday, the council remarked that short-maturity market yields had shifted higher despite unchanged central bank guidance to keep policy loose.

Investors haven’t all bought into the central bank’s dovish message. KBC Groep NV said policy makers in Budapest may make their first steps toward tightening already this year by unwinding some of their unconventional easing. Forward-rate agreements now price about a quarter percentage point in policy tightening over the next 12 months, according to Bloomberg data.

"Current monetary conditions in Hungary are too loose and will need to turn more neutral in the future," said David Nemeth, an analyst at KBC in Budapest. He predicts an uptick in inflation to near the central bank’s 3 percent by end-year.

But price growth isn’t limiting policy makers’ maneuvering room yet. Annual inflation slowed to 2.1 percent in January, from as much as 2.6 percent in August, nearing the lower edge of a tolerance band around the central bank’s 3 percent target. That’s despite wages rising by 13 percent in 2017 and the economy growing at its fastest pace in three years.

As a result of the dovish stance, the forint has weakened 2 percent in the past 12 months to 313.97 per euro on Tuesday, while the Czech koruna surged 6.4 percent and the Polish zloty 3.4 percent.

“Investor sentiment toward Hungary is likely taking a turn for the worse, given an unwarranted easing push by the National Bank of Hungary,” said Mai Doan, an analyst at Bank of America Corp. With a current-account buffer shrinking quickly, "fundamental appreciation pressures on the forint will likely wane this year.”

(Updates with central bank statement, analyst comment from second paragraph.)
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