The National Bank of Hungary (NBH) may not need to change the base interest rate till 2019 and even beyond, NBH deputy governor Marton Nagy said at a Reuters conference. He referred to projections by market analysts for the rate to remain unchanged till early 2019, saying they were realistic. It could be even longer than that, extending throughout 2019 and to 2020, he added. Keeping the rate unchanged would be allowed by inflation expectations anchored at very low levels despite strong wage growth, Nagy explained. He noted that the NBH was rather concerned with the overall monetary conditions, including money market rates, short-term yields and implied forint yields on the swap market, than just the base rate level. We think Nagy’s statement practically means that the NBH will respond to any need for tightening by first unwinding its unorthodox loosening policy measures and resort to base rate hikes only afterwards.
Maintaining liquidity conditions loose required the NBH to crowd out HUF 300-400bn of funds from the main monetary instrument, the three-month deposit, or through the forint swap instrument each quarter, Nagy said. As we reported, the NBH has signaled that it expected bank liquidity to gradually decline in the next months, which required the reduction of the three-month deposit cap in order to keep monetary conditions loose. There is an increasing likelihood that the NBH will restrict the three-month deposit cap further in Q3, taking into account Nagy’s statement and the MPC dovish policy guidance, in our view. Moreover, Nagy said that downward risks to inflation had strengthened since March, which we think clearly points to the MPC policy guidance for continued unorthodox loosening in case of inflation persistently below the target.
The NBH will also closely watch when the ECB will start tapering its monetary easing and when neighboring countries will start tightening, Nagy said.