Hungary: Second rate cut is certain, more cuts under question

The MPC will certainly reduce the base rate further in April, National Bank of Hungary (NBH) deputy governor Marton Nagy said, the news portal Portfolio reported. The question is whether there will be a third and fourth rate cut, he said and added that he personally preferred the rate cuts to be in 15bps steps. As we reported, the MPC reduced the base rate by 15bps yesterday, which was earlier-than-expected, based on previous statements by Nagy. Nagy explained that the early rate cut meant to deliberately surprise markets, which we think might confirm market comments that the NBH aimed to pressure the forint down. The reasons for the rate cut are clear, Nagy said, pointing to the low imported inflation and the improvement of the country’s external vulnerability position.

The March easing decision of the MPC contained unorthodox elements as well with the narrowing of the upper band of the overnight interest rate corridor, Nagy said. This instrument will increase in importance in the future and the MPC could also use it simultaneously with the base rate, he noted. The MPC might decide not to push the overnight deposit rate deeper into negative territory in case of another rate cut, he said, since very negative deposit rates were not very effective. Nagy also stressed that the NBH will also concentrate on the interbank market since it was the most important market in terms of loan pricing, in our opinion signalling that the narrowing of the overnight corridor aimed precisely to reduce the interbank interest rate.

The NBH also decided to reduce the interest rate on the NBH’s one-week loan – from 25bps above the base rate to 15bps above the base rate. In addition, the NBH introduced a negative 0.05% interest rate on banks’ excess reserves starting from Apr 7, compared to the current zero rate. We think the measure should not have significant impact on banks since excess reserves have been always quite low, most recently amounting to HUF 2.1bn on average in February. The reduction of the one-week loan rate might be more effective, in our opinion, as banks have used the instrument to an average amount of HUF 150bn per week since the beginning of the year and demand has tended to increase in March.

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