Hungary set to cut lending rate to boost inflation
Hungary’s central bank is set to lower its main lending rate and adjust its overnight rates to try to rekindle inflation, one of the central European country’s top central bankers said on Thursday.
Adjusting the overnight rates would come “soon” ahead of a probable rate cut later in the year, National Bank of Hungary Vice Governor Marton Nagy said.
“The central bank is ready to use any tool to reach the inflation target; cutting the key rate this year is very likely,” Mr. Nagy said at a conference.
Inflation expectations have never been so low in Hungary while the Hungarian forint’s performance on currency markets is also making it hard for the central bank to meet its inflation target of 3%, the central banker said.
The forint’s resilience has been remarkable. The risk is great that we will miss the inflation target with the current exchange rate,” Mr. Nagy said.
Annual inflation was 0.3% on the year in February, having fallen more than expected for several months in a row, partly because of lower oil prices.
The National Bank would “adjust” its so-called interest-rate corridor between its overnight deposit and overnight lending rates “soon,” Mr. Nagy said. He noted that liquidity and the central bank’s balance sheet is set to shrink by some 3 billion euros ($3.3 billion) in March.
Mr. Nagy didn’t indicate how those rates would change. At present, the overnight deposit rate is at 0.1% and the overnight lending rate is at 2.1%.
The comments confirm a major shift in the central bank’s monetary policy stance at moment when central banks across Europe, including the European Central Bank, are battling to find ways to bring inflation back up toward official targets.
Hungary has had loose monetary for some time, with the central bank’s policy set at a record low of 1.35% for more than two years.
The central bank will hold its next rate meeting March 22, when it is widely expected to lower its inflation forecasts.
Most economists had expected Hungary to start loosening monetary policy with unconventional measures this year, but not with conventional measures such as interest-rate cuts. Expectations are now changing and some analysts now see the key rate will be cut to 1.0% this year.
“Underperforming the inflation goal is great risk under the current monetary conditions. Even looser conditions are needed,” Mr. Nagy said.
Source: MarketWatch
