National Bank Cuts Key Policy Rate to 16%

The National Bank of Hungary (MNB) has cut its key lending rate by 1 percentage point to 16%, while leaving the base rate unchanged at 13%. The latter is expected to be lowered when the two converge.

According to central bank vice-president Barnabás Virág, there are already signs of improvement in inflation, with a figure of 16.5-18.5% expected for the full year.

In his view, the improving financial indicators (falling inflation and a relatively stable HUF/EUR exchange rate) led the MNB to start changing its interest rate policy at the end of April.

In a first round, the overnight lending rate was cut from 25% to 20.5%, i.e. the interest rate corridor was narrowed significantly. Then, at the end of May, they also tightened the overnight deposit tender rate, their most important instrument, which served as the benchmark rate, and reduced it from 18% to 17%.

In his press conference at the time, MNB President György Matolcsy indicated that the benchmark rate would be gradually reduced over the next period until it was equal to the base rate. Experts say this is likely to happen in the autumn, with a cut in the base rate being the next step.

Experts point out that a cut in the policy rate has a number of consequences for the economy: in the long run, for example, it could reduce the interest rates on loans available from banks. In return, the interest rate premium on government bonds has been cut recently, citing the lower benchmark rate, although as we have written, new series still pay no worse than old ones.