After 4 years, Hungary’s central bank cuts base rate to 0.75 pc

Hungary’s central bank (NBH) rate-setters cut the base rate by 15 basis points to 0.75 percent at a regular meeting on Tuesday.

The base rate had been set at 0.90 percent since May 25, 2016.

The bank’s Monetary Council decided to leave the O/N deposit rate at -0.05 percent and the O/N and one-week collateralised loan rates at 1.85 percent.

The O/N deposit rate and the collateralised loan rate mark the bottom and the top, respectively, of the central bank‘s “interest rate corridor”. The base rate is paid on mandatory reserves and preferential deposits.

The forint traded at 350.61 to the euro about 20 minutes after the decision was announced, softening from 348.72 before.

In a statement released after the meeting, the Council referred to the rate cut as a “fine-tuning measure” that “supports the maintenance of price stability and the recovery of economic growth”.

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It noted that the outlook for inflation has “shifted downwards persistently” due to strong disinflationary effects, while the country’s economic performance in 2020 is “likely to be more subdued than earlier expected”.

The Council said a “a similar shift … as in the base rate” is “warranted” for the one-week deposit rate, which the central bank sets at weekly tenders.

The Council suggested its tool chest would not be expanded.

“In the Council’s view, the current set of instruments provides appropriate room for manoeuvre to respond to emerging challenges in a targeted and flexible manner,” it said.

The Council said it “continues to consider” a government securities purchase programme launched among measures responding to the coronavirus crisis “as a safety net, which it intends to use in case necessary and to the extent necessary”.

The NBH started holding auctions — on a weekly basis — to buy government securities early in May, but has not held any for four weeks in a row.

The Council said it “continuously assesses incoming data and changes in the outlook for inflation”, adding that the bank “will use every instrument at its disposal to achieve price stability and to support the Hungarian economic and financial system”.

Explaining the base rate cut, NBH governor György Matolcsy told a press conference after the council’s meeting that the central bank had to make decisions for the economy to take the expected jumpstart from the third quarter. After the 2.2 percent growth rate in the first quarter, the Hungarian economy could have contracted by an annual 7 percent in the second quarter, according to preliminary NBH estimates, Matolcsy said.

The aim is to make the business environment even more supportive, Matolcsy said.

Also, the NBH intended to signal that it considers the base rate important and that it has room for manoeuvre, he added. Among the NBH’s main goals, price stability and the stability of the financial system have been preserved, and an additional goal is to support the government’s economic policy, he noted.

Matolcsy also said that

the “hard part” of dealing with the epidemic was over for Hungary, saying that the country had “won” the first phase of managing the outbreak.

Citing a Hong Kong-based analysis firm, Matolcsy said Hungary was in fourth place in the European Union when it comes to the handling of the pandemic, adding that this constituted a “victory”.

Deputy governor Barnabás Virág told the same press conference that the base rate cut was a “symbolic” step, a “discrete decision”, and not a decision on the start of a cycle.

Source: MTI