The MPC decided to keep the base rate unchanged at 0.90% on its March rate-setting meeting, the National Bank of Hungary (NBH) announced. It also made no changes to the overnight interest rate corridor and the one-week collateralised lending rate. The decision was entirely expected, given the earlier communication that inflation risks remain balanced on the downside and upside as well as the MPC practice of reviewing its monetary policy stance on a quarterly basis together with the release of the updated Inflation Report of the NBH. Moreover, the NBH recently halted the gradual monetary tightening through the forint-liquidity swap portfolio, in our opinion indicating that it does not consider further action necessary to counter the pick-up in consumer inflation at this stage.
The MPC made no changes to its monetary policy guidance either. It maintained word for word its guidance compared to the previous rate-setting meeting from April. In particular, it repeated that financing conditions will remain favourable for economic agents. The MPC focuses on price stability but there risks for the inflation outlook remained diverging on both the upside and the downside, it reiterated. The balance of the inflation outlook risks will be considered in a five-eight quarter horizon relevant for monetary policy, it added. The monetary policy approach will remain cautious and will be shaped by the forecasts of the inflation report, the MPC concluded.
As we expected, the MPC remained unconcerned about the overheating risks, following the higher-than-expected GDP print for Q1. The MPC noted the high growth but noted that the current account remained in surplus in Q1, according to the preliminary data. It also projected that the tax-adjusted core inflation, the NBH’s preferred underlying inflation measure, will continue to accelerate until the autumn months but will start to decline till the end of 2019. We thus expect that monetary policy might remain overly accommodative in the next months, given that a potential further acceleration of inflation might not force the MPC into new tightening. Despite the MPC’s mild tone, we think the upside risks to price and financial stability have strengthened, taking into account the strong GDP print and the booming housing market as well as the risks for inflation expectations getting unanchored by rising food prices.