On Tuesday, the Central Bank cut its main interest rate to 1.2 percent from 1.35 percent. The same day, the Central Bank set a new record: by slashing the overnight base to -0.5 percent, Hungary became the first emerging market to introduce negative rates.
The move surprised some market analysts, but the strong demand for Hungarian state bonds, even at a lower rate, the positive international market environment and inflation targets all pointed in that direction, making it the next logical move for the Bank. “We expected a rate cut in March, it was a logical sequence of events,” Urbanska-Giner, a London-based analyst at HSBC Holdings Plc., told Bloomberg. If similar conditions remain, there is no doubt further rate cuts are possible.
Lower base rates mean cheaper financing for the central budget, and for businesses and families. Meanwhile, the government’s official budget policy ensures that cheap resources will not cause an increase in the budget deficit. Strict financial policies implemented since 2010 have helped reduce the debt-to-GDP ratio to 75.3 percent by the end of 2015 from above 81 percent the year before, making Hungary one of the few EU member states to reduce its nominal debt. In the coming years, policymakers at the Ministry of National Economy are planning a balanced budget, aiming at zero deficit, which would decrease real debt as well.
“The Monetary Council remains ready to use every instrument at its disposal to contain second-round inflationary effects. Interest-rate cuts will continue as long as monetary conditions become consistent with the sustainable achievement of the inflation target,” said the Monetary Council of the Central Bank in a statement.
Forecasts over the past few months predict a very optimistic 2016 for the Hungarian economy, so the Central Bank has upped its economic growth forecast for the country to 2.8 percent from 2.5 percent.
The Hungarian stock exchange has rallied in the past month, restoring blue chip stocks back to their pre-crisis prices. The shares of OTP, Hungary’s largest bank, rallied to an eight-year high, but others have also performed well.
Hungary’s economic recovery over the past six years continues to show results. We have every reason to remain upbeat regarding the economic performance thus far in 2016.