The National Bank of Hungary’s Monetary Council left the base rate on hold at 9.50pc at a rate-setting meeting on Monday.
The move was largely expected by markets. The bank has cut rates 200bp from November to January, reversing much of a 300bp emergency rate rise in October. At the previous rate-setting meeting in February all nine members of the Monetary Council voted to keep the bank’s key rate on hold.
The Monetary Council based its Monday decision on factors related to the real economy and inflation, as well as the stability of the financial system.
The council will attempt to prevent financial processes from breaking away from the foundations of Hungary’s economy in the future. The council is ready to use all the monetary tools at its disposal to meet this objective, the councilé sressed in its statement after the meeting.
The forint has weakened over recent months due to increasing global risk-aversion and the changing assessment of the central and eastern European region. Continuing devaluation would have a negative mid-term effect on the capital situation of the financial-mediation system, and possible favourable effects would be questionable. The weakening forint restrains the lending activity of banks, while the deteriorating lending portfolio would have a negative effect on the capital situation.
The Monetary Council said the risk of a deeper economic slump has increased. The population will adapt to the changes that have taken place in global financing and their diminished income prospects by reducing consumption, which would decrease the external financing needs of the Hungarian economy.
Services price inflation has been falling sharply for several consecutive months, due to the pricing of the economic downturn. However, the pass-through of weaker exchange rates into tradables prices is adding to upside risks to inflation. In the short term, exchange rate depreciation contributes to an improvement in the profitability of exporting firms and the competitiveness of domestic producers against imports. Its effect on growth, however, may be offset by the fact that economic agents are suffering sizeable losses on their positions taken in anticipation of an appreciation. The depreciation of the forint has led to a slowing in banks’ lending, and it may worsen their capital position over the medium term through a deterioration in the loan portfolio.