The Hungarian financial landscape witnessed yet another step in the ongoing monetary easing cycle as the nation's central bank announced a significant rate cut in August. With the ebbing pace of inflation creating room for further rate reductions, all eyes are now on the impending merger of the effective and base rates, set to occur in September. This convergence promises to streamline policy-making by providing a simplified toolkit for the monetary policymakers in the journey ahead.
The Monetary Council of the Hungarian National Bank (MNB) reduced the reference overnight deposit rate to 14% by a full percentage point. The rate is now only 100 basis points above the base rate of 13%. The move was widely expected by analysts and priced into market instruments. Concurrently, the council also reduced the O/N collateralized loan rate, implementing a 100-basis point cut to peg it at 16.50%, marking the fourth consecutive month of such reduction.
In a carefully crafted statement released post the August 29 meeting, the central bank policymakers emphasized the need for a deliberate and gradual strategy in monetary policy, aiming to establish price stability in the present climate. An ongoing evaluation of international financial market developments' impact on the domestic risk environment, coupled with the analysis of incoming macroeconomic data and shifts in inflation projections, lies at the heart of the MNB's decision-making process.
"If the improvement in risk perceptions persists, the MNB will continue to close the gap between the interest rate conditions of one-day tenders and the base rate," the central bank's statement affirmed.
Economists at ING Bank in Budapest have dissected the August rate-setting session, branding it a strategic move by the central bank to shape market expectations for monetary policy in the upcoming quarters. "In our view… the NBH is either suggesting smaller steps in future cuts and/or adding the pause to the mix of decisions. Nonetheless, the pushback against ‘excessive expectations’ is a clear hawkish message," they noted, interpreting the nuanced messaging behind the central bank's approach.
As part of its strategy to stabilize the national currency, the central bank introduced the quick deposit facility during daily tenders. Initiated at an 18% rate, this move stemmed the decline of the forint, representing a 5 percentage point increase from the base rate in mid-October. The MNB started its monetary loosening cycle in May, capitalizing on the gradual deceleration of inflation from its peak of 25.7% in January.
Calibrating inflationary waves
Central bankers highlighted the pronounced decline in domestic inflation in July, with an impressive 2.5 percentage point decrease to stand at 17.6% on an annual basis. This dip was attributed to the slowdown in the price dynamics of processed food and manufactured goods. In parallel, core inflation also experienced a 3.3 percentage point slump, settling at 17.5% during the same period.
Notably, inflation expectations among households and corporations echoed this downward trend, indicating a collective sentiment of optimism regarding future price dynamics. With a promising trajectory, the anticipation mounts for inflation to descend into the single-digit domain in autumn, gradually aligning with the central bank's target tolerance range of 4%, expected to be reached by early 2025.
Charting a course for the future
With September on the horizon, Deputy Governor Barnabas Virág heralded a forthcoming paradigm shift in the realm of monetary policy. As the base rate and the quick deposit rate align, Virág emphasized that the central bank's focus remains steadfast on taming inflation. This transition will see the central bank streamline its toolkit by eliminating instruments that have become redundant, while retaining those that bolster financial market stability.
Virág underscored that the journey ahead would be marked by a judicious, data-driven approach, dispelling any notion of an "autopilot" mode for monetary policy. The impending convergence of the base rate and quick deposit rate at 13% in September heralds the possibility of Hungary experiencing positive real interest rates, an alignment poised to aid the realization of inflation targets. Virág added that this could potentially position Hungary with the highest gap between interest rates and inflation in the region.
As the nation stands on the cusp of this new monetary phase, attention turns to the revision of the central bank's 2023 GDP forecast, set to be unveiled in the upcoming Inflation Report in September. With Prime Minister Viktor Orbán voicing contentment with a "plus zero" growth, in contrast to the government's official target of 1.5%, Hungary's economic trajectory remains an evolving narrative.
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