Central bank of Hungary cut its base rate by 20 basis points yesterday to the new all time low at 3.6% and signalled that it sees room for further easing. The NBH launched its monetary easing cycle in December 2011 and since then, it has lowered its base rate in 14 consecutive steps overall by 340 basis points.
Monetary easing has been gradual, with individual steps not bigger than 25 bps and the last two steps even smaller (20 basis points). In yesterday’s statement, the NBH said that further cautious easing of monetary conditions may follow, indicating thereby that possible future cuts might be even smaller. The new inflation report shows that the NBH sees inflation pressures in the economy even more subdued now than 3 month ago. The bank cut its average inflation forecast for 2014 to 2.4% from 3.2%, far below the medium term target of 3%. In contrast, the bank is increasingly optimistic concerning the GDP growth outlook when it predicts that the Hungarian economy will grow by 2.1 % in 2014 (previously 1.5 % GDP).
Nevertheless, according to the NBH Council judgement, there remains a large stock of spare capacity in the economy. Neither inflationary pressures nor economic overheating deliver central bankers enough arguments for stopping the rate cutting cycle. Yet there does remain a crucial factor that will make them cautious in conducting the monetary easing: global financial markets. The exchange rate of the forint matters mainly because of the frequently quoted Hungarian problem with FX loans. Although first attempts to help households convert their FX loans to the forint date back to 2011, discussions between the finance ministry and the Banking Association addressing this topic have not been finished yet. Household´s FX loans still amount to 11bn EUR. We believe that future monetary policy measures of the NBH will remain sensitive to the forint volatility and possible cuts will be even smaller then so far (e.g. 10 bps). Nevertheless, even after yesterday´s NBH meeting, uncertainty about the bottom of the rate cycle persists.