Looser monetary policy can hardly improve the outlook for growth in Hungary, National Bank of Hungary governor Andras Simor said in an interview published by Portfolio.hu on Thursday. “There is a stereotype that a low interest rate is good and a high interest rate is bad, which is a very simplified picture of the world. Here and now in Hungary, a rate cut can hardly improve the outlook for growth,” Mr Simor said.
Minutes published on Wednesday from a meeting of the central bank’s Monetary Council showed Mr Simor and his two deputies voted to keep the NBH’s key rate on hold at a meeting on August 28, but were outvoted by the body’s four external member, who wanted to cut the rate by 25bp to 6.75pc.
“The majority view of the Council was that it was time to act in the interests of growth,” according to the minutes.
Mr Simor told Portfolio.hu that a rate cut could support an economic pickup in a textbook scenario, but this was not the case in Hungary.
The weaker forint “could hardly boost exports further”, he said, noting that the country’s current account surplus is already “unmatched in the region”.
He also pointed out that the weaker forint would cause higher repayments for borrowers with foreign currency-denominated loans, negatively affecting consumption.
Much of Hungarian banks’ corporate and consumer lending stock is denominated in foreign currency. Forex loans were earlier popular because they had lower interest rates than forint loans.
Mr Simor noted that almost half of Hungary’s “already high” state debt is in foreign currency, and a weaker forint would cause this debt to grow.
“Monetary policy can stimulate demand at best minimally through exchange rates,” he said.
Mr Simor also said the lower base rate would have little effect on lending by commercial banks, explaining that the lack of lending activity in Hungary is not the result of a lack of demand but of banks’ unwillingness to lend.
“This is a transmission problem, the rate cut simply does not transfer to effective interest rates,” he said.
He attributed the low level of investment in Hungary as well to “unpredictability, the uncertain regulatory environment” and “the loss of business confidence.
Mr Simor said an agreement with the International Monetary Fund and the European Union on precautionary financial assistance Hungary is seeking could ease the differences between the Monetary Council’s external and internal members.
“It depends on whether the agreement can further reduce the risk premium and cause inflation to slow,” he said. “It could also happen that most of the market has already priced in a positive outcome on the IMF/EU matter, in which case we could expect a significant deterioration if the deal falls through,” he added. If that is the case the signing would not cause an improvement, he said.
Mr Simor said he himself would continue to weigh the inflationary effect of monetary policy when voting on rate-setting decisions.
“I cannot do otherwise, as this is the task set out for us by lawmakers,” he added.
