November 17, 2015

At its meeting on 17 November, the Central Bank of Hungary (NBH) decided to leave the base rate unchanged at the record-low 1.35% for a fourth consecutive meeting. The move was expected by market analysts and comes after the Bank had cut the base rate gradually from 2.10% to 1.35% over five successive meetings. In addition, the NBH signaled that it will likely hold the rate at this low level over the medium term.



The NBH commented that inflation returned in October, although inflation still remains far below the Bank’s target. The Bank added that core inflation should increase slowly as domestic demand and wages grow. However, the NBH expects inflation to remain below target in the near term and only rise to near 3.0% at the end of the forecast horizon.



Regarding the economy, the Central Bank noted that GDP continued to expand in Q3, albeit at a lower rate than expected. Slower external demand drove weaker industrial production growth in the third quarter, while retail sales remained dynamic. However, government investment is expected to drop going forward as EU funding falls, but will be offset by a gradual pick-up in private sector investment and the NBH’s Growth Supporting Program. Meanwhile, global financial markets have been driven by uncertainty regarding the timing of a hike in U.S. interest rates and concerns over growth in emerging economies. In Hungary, financial markets have experienced increased volatility and the forint depreciated moderately against the euro. Long-term government bond yields have been broadly stable since the last monetary policy decision and market yield expectations have progressed in line with the Bank’s guidance. The Bank added that, “a cautious approach to monetary policy is still warranted due to uncertainty in the global financial environment.”



In conclusion, the Bank emphasized that unused capacity persists in the economy and inflationary pressures are likely to remain subdued. The Bank added that under current assumptions, “the current level of the base rate and maintaining loose monetary conditions for an extended period, over the entire forecast horizon, are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy.” The next monetary policy meeting is scheduled for 15 December.

FocusEconomics Consensus Forecast panelists see the base rate ending 2015 at 1.35%. For 2016, the panel sees the base rate ending the year at 1.50%.