Hungary’s central bank leaves base rate on hold

Photo: Daily News Hungary - Alpár Kató

The Monetary Council of the National Bank of Hungary left the base rate unchanged at 0.90 percent and the central bank O/N deposit rate at -0.05 percent at a regular meeting on Tuesday.

The Council also decided to leave the central bank’s O/N and one-week collateralised loan rates unchanged 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.

At a meeting three weeks earlier, the central bank’s policy makers unveiled a package of measures to mitigate the impact of the coronavirus pandemic on the economy and establish the conditions for a jump-start. The measures included 1,500 billion forints (EUR 422.2m) in financing for cheap loans for businesses and a programme to buy government securities on the secondary market.

On Tuesday, the National Bank of Hungary said

its government securities purchases will take place on the secondary market at regular weekly auctions and in transactions outside of the auctions.

To prevent the NBH from becoming a dominant market player, the amount it may purchase of any securities series will be capped at 33 percent of outstanding stock, in line with European Central Bank practices.

The programme will involve only fixed-rate Hungarian government securities.

The Council said the NBH’s mandate remains “to achieve and maintain price stability, to preserve financial stability, as well as to support the Government’s economic policy”.

It added that the asset purchase programmes are intended “to prevent damage to…monetary policy transmission and manage economic and financial risks arising from the coronavirus pandemic”.

Both asset purchase programmes will launch on May 4.

The Council sees inflation falling under the central bank’s 3 percent mid-term target in the coming months, mainly as the result of a sharp decline in fuel prices, before stabilising gradually at 3 percent.

Core inflation excluding indirect tax effects — a bellwether indicator of underlying inflation — “is likely to be around 3.2-3.5 percent on average in 2020, before decreasing gradually to 3 percent”, the policy makers added.

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