Hungarian central bank made unexpected decision! – UPDATED

The Monetary Council of the National Bank of Hungary (NBH) decided to leave the base rate on hold at 13.00 percent, but voted to cut the central bank’s O/N collateralised loan rate by 450 basis points to 20.50 percent at a monthly policy meeting on Tuesday.

Deputy governor of the MNB Barnabás Virág had flagged the cut in the O/N collateralised loan rate, the top of the central bank’s “interest rate corridor”, a week earlier. In a statement released after the meeting, the Council said it was necessary to maintain the current level of the base rate over a prolonged period, which it said would ensure that inflation expectations are anchored and the inflation target is achieved in a sustainable manner. They said the risk environment, including Hungary’s risk perception, has “improved significantly”, driven by both external and internal factors. The decision to narrow the interest rate corridor was taken “in response to the reduction in the risks of extreme scenarios”, they added.

The central bank will “take into account the persistence of improvements in risk perceptions at the following policy meetings before making a decision to setting the interest rate conditions of overnight instruments”, the statement said. The Council noted that the transition to the increased mandatory reserve requirement ratio, from 5 percent to 10 percent from April 1, was “smooth”. They added that disinflation was expected to accelerate in the next months, “which will also be supported by the growing impact of base effects from the middle of the year”.