EMEA Snap:Hungary (NBH),Stuck at ultra-low levels

NBH keeps policy tools unchanged.

    As expected, the National Bank of Hungary (NBH) kept its base rate unchangedat its all-time low of 0.9% in the July meeting on Tuesday. The lending ratewas also kept unchanged (at 0.9%), as was the overnight deposit rate (-0.05%).

    Accordingly, the interest-rate corridor remained steady at 95bps. There was nochange in the cap for the 3-month deposit facility (currently at HUF 300bn forQ3-17) given that the next review date (for the limit at the end of Q4-17) isSeptember 19th .

    The statement is virtually unchanged from June, except for a few usualamendments pertaining to the latest macro outturns. In the absence of anyupdate in macro projections (next round will be in September), the Bank stillexpects inflation to reach the 3% target level in a sustainable manner from early2019. However, among the few changes, today's statement says that CPI is nowexpected to remain near its current level over the rest of the year, as comparedto “remain around its current level in the summer months and then to rise slowlyas the end of the year approaches” in the June statement, pointing to risingdownside risks to the NBH’s July forecasts. The NBH has also kept its assessmentthat the “external environment continues to pose a downside risk to inflation”.

    The MPC is still poised for stable annual real GDP growth around 3-4% per annumon the back of its accommodative policy stance as well as the government’ssupportive measures. On recent market performance, the Bank points to thesteepening in the interbank yield curve and the increase at the long end of the yieldcurve for government securities. There is not much change in other parts of thecommuniqué, with the MPC retaining its watchful approach due to uncertaintiesin global financial markets.

    What to expect next.

    Forward-looking bits of the statement are unchanged with the NBH stillcommitted to maintain the current base rate and loose monetary conditions foran extended period. The MPC also reiterates its readiness to ease monetaryconditions further, via unconventional, targeted instruments, if inflation remainspersistently below the 3% target.

    The MPC looks set to firmly retain its easing bias for as long as possible. We expectthe base rate to remain at its ultra-low level (0.9%) at least until end-2018. The nextdecision on the limit for three-month deposits will be in September, and the Banklooks set to limit the cap further given its expectations of declining liquidity in thebanking system and also policymakers’ inclination to keep monetary conditionsas loose. We envisage a gradual rise in (more market-relevant) BUBOR rates (currently 15bps at the 3-month tenor) only starting in H2 2018, i.e. after generalelections are out of the way and headline inflation starts converging to the 3%target.