The Monetary Council of the Hungarian National Bank cut the base interest rate by another 15 points at its June meeting, with an end result of 1.5%. This is another “high” score in the who-knows-how-long series. However, it is still not the end of the reduction cycle.
The most recent reduction seemed like a done deal, until storm clouds gathered in the past few days due to the “Grexit” scenario (that`s “Greek exit”, to the laymen). When the Greek government finally gave in, the doubts disappeared: the National Bank (MNB) base interest rate was cut by another 15 points to 1.5% – a record score ever.
Last summer the MNB adjusted the so-called “long march” introduced in mid-2012 under the leadership of governor György Matolcsy, which resulted in reducing the forint base interest rate by a total of 490 base points from 7.0% to 2.1%. The Hungarian currency tends to trade increasingly weaker due to this monetary ease, however the fluctuations predicted by the many critics did not come. In July 2014 it was declared that the rate decrease was over after reaching the level of 2.1%.
Although Hungary just entered the land of deflation, giving the Monetary Bank a way wider scope to reduce interest, the international risks have gotten more serious; the escalation of the conflict in Ukraine or Greece leaving the European Union could have forced MNB to take drastic measures.
If this happened, the Hungarian central bankers would only be able to react to the events on other “fronts” in a hectic manner, while today they are the ones who have a firm hold on the course of events. As soon as the international situation seemed to ease somewhat and the inflation of consumer prices reduced by even -1%, the experts of Matolcsy thought it was time to sink the HUF base interest into daring depths never experienced before.
The target of 1.5% set this spring was achieved only in four steps, since the Monetary Council did not cut only 10 base points last year but even 15. It’s still not enough, as they offered the comment with the latest reduction in June that further cautious reduction will be helpful in hitting the inflation target. The mid-term target has been 3% for some time now, however from this year on they are applying a tolerance interval, saying the target is moving between 2-4%.
After the average annual inflation reached the historical low point of -0.2% in 2014, the MNB remained unimpressed by the strong deflation still experienced at the beginning of this year, and they are still calculating with a decent 0.3% increase of consumer prices for the whole 2015 according to the most recent inflation report from June.
Since the economic momentum of the previous year (with 3.6% growth Hungary scored in the top field of Europe) could be kept for this year to a large extent – MNB has just increased its growth prognosis for 2015 to 3.3% – the central bankers are not really kept under pressure by any internal constraint.
In Europe, Japan and the USA we can also expect a similarly loose monetary policy; there will be neither any inflation pressure built up nor an especially dynamic growth has to be “feared”. In conclusion the MNB – as most of the analysts agree today – will surely not end the series of interest cuts until reaching 1.3%.
At the moment we can only guess how it will continue in autumn. The fact that the average yield of three-month discounted treasury bills has just reached 1% tells much more about the mood in the markets.