As widely expected, the Hungarian central bank cut its base rate for the third time in a row, so the rate slipped to the 6.25% level. Thus, the real rate slipped to a negative territory, because currently the year-on-year inflation stands at 6.6%.
As Governor Simor explained, the thin majority of doves in the MNB Monetary Council believes that impact of one-off price shocks will dissipate from the index and inflation will converge to the target in the medium term. Moreover, although Governor Simor might not be happy with a tone of the MNB statement, it actually says that ‘the Council will consider a further reduction in interest rates if data becoming available in the coming months confirm that the improvement in financial market sentiment persists and the medium-term outlook for inflation remains consistent with the 3 per cent target’.
Thus, the above sentence confirms that the reaction function of the MNB monetary policy remains unchanged – meaning that the base rate is primarily driven by global market sentiment and the forint. Quite interestingly, the forint strengthens in the favourable market sentiment despite yesterday’s rate cut and uncertainty over the EU/IMF agreement. This might, however, change by late November, when the next interest-rate meeting is being held.