Hun­gar­ian cen­tral bank flags more eas­ing af­ter hold­ing key rate

The Pak Banker - - COMPANIES/BOSS -

The Hun­gar­ian cen­tral bank may ease mon­e­tary con­di­tions fur­ther as they seek to com­bat below-fore­cast in­fla­tion and limit an eco­nomic slow­down, pol­icy mak­ers said, af­ter leav­ing the bench­mark in­ter­est rate un­changed for a sev­enth month. Rate­set­ters left the main rate un­changed at a record-low 1.35 per­cent on Tues­day, match­ing the fore­casts of all 17 econ­o­mists in a sur­vey. Pol­icy mak­ers may ease mon­e­tary con­di­tions fur­ther con­sid­er­ing what they see in the March in­fla­tion re­port, the bank said in a state­ment.

The Mon­e­tary Pol­icy Coun­cil "is closely ex­am­in­ing de­vel­op­ments in the for­eign mon­e­tary en­vi­ron­ment, par­tic­u­larly the mea­sures of the Euro­pean Cen­tral Bank," to en­sure mon­e­tary con­di­tions are ad­e­quate to meet the in­fla­tion tar­get, the bank said af­ter the de­ci­sion.

Pol­icy mak­ers are hold­ing back from rate cuts even as in­vestors price in fur­ther re­duc­tions in the bench­mark. Vice Gov­er­nor Mar­ton Nagy said Jan. 29 that the reg­u­la­tor won't cut its main rate and would in­stead fo­cus on overnight loans and de­posits as an out­let for pos­si­ble mon­e­tary eas­ing.

De­riv­a­tives con­tracts show in­vestors are un­con­vinced by the mon­e­tary au­thor­ity's rate fore­cast. For­ward-rate agree­ments used to wa­ger on bor­row­ing costs in six months showed bets for 15 ba­sis points in re­duc­tions to the bench­mark rate, the most in three weeks. The forint has gained 2.7 per­cent against the euro this year, the fourth-best per­for­mance glob­ally.

The cen­tral bank "may con­sider re­sum­ing in­ter­est rate cuts in May or June the ear­li­est," pro­vided the Euro­pean Cen­tral Bank trims bor­row­ing costs in March and the next Fed rate in­crease is de­layed, Gergely Ur­mossy, an econ­o­mist at Er­ste Group Bank AG's lo­cal unit, said in an e-mailed note.

The dilemma fac­ing Hun­gary is shared by nearby Poland, whose bench­mark rate has re­mained at a record low since last March. De­riv­a­tives traders are bet­ting on a quar­ter-point of eas­ing by the Na­tional Bank of Poland in the next six months as in­fla­tion un­der­shoots its fore­casts. Fail­ure to gauge price move­ments prompted an apol­ogy from Gov­er­nor Marek Belka ear­lier this month.

The cen­tral bank has com­ple­mented a pro­gram of free fund­ing to lenders with new of­fers and reg­u­la­tions. That in­cludes three-year in­ter­est-rate swaps, where the reg­u­la­tor takes on part of the credit risk if banks boost bor­row­ing in re­turn. It's also try­ing to chan­nel lenders' de­posits at the cen­tral bank into sov­er­eign bonds to cut govern­ment bor­row­ing costs as an­other part of its un­con­ven­tional-pol­icy arse­nal.

If cen­tral bankers agree that fur­ther eas­ing is nec­es­sary, the reg­u­la­tor will next hone in on its in­ter­est-rate cor­ri­dor, Nagy said on Jan. 29. The mon­e­tary au­thor­ity may make a de­ci­sion on the cor­ri­dor in March or April, af­ter eval­u­at­ing liq­uid­ity flows dur­ing the phas­ing out of its twoweek de­posit fa­cil­ity, its for­mer bench­mark in­stru­ment.

Pol­icy mak­ers al­ready low­ered the in­ter­est rate of­fered on overnight de­posits and charged on loans in Septem­ber by 25 ba­sis points to 0.1 per­cent and 2.1 per­cent, re­spec­tively, as they sought to in­crease the cost of park­ing ex­cess liq­uid­ity at the cen­tral bank com­pared with buy­ing govern­ment bills.

Con­sumer prices rose 0.9 per­cent in Jan­uary from a year ear­lier, un­changed from De­cem­ber. The cen­tral bank fore­cast in De­cem­ber that in­fla­tion will ac­cel­er­ate to an av­er­age of 1.7 per­cent this year from 0.1 per­cent in 2015. That com­pares with its 3 per­cent medium-term tar­get.

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