Hungary's central bank holds rate for second month

The central bank is working alongside the government to boost economic growth after GDP unexpectedly contracted in the first quarter

Hungary’s central bank left its benchmark interest rate unchanged at a record low, in line with policymakers’ guidance to focus on unconventional tools for any future monetary easing, Bloomberg reports today.

The National Bank of Hungary kept the three-month deposit rate at 0.9 percent, matching the estimates of all 19 economists in a Bloomberg survey. It also left the overnight loan and deposit rates unchanged at 1.15 percent and minus 0.05 percent.

The monetary authority will accept deposits in its benchmark facility monthly instead of weekly starting in August and begin capping deposits in October.

The shift is aimed at boosting lending by reducing borrowing costs on the inter-bank market or cutting government bond yields by channeling commercial-bank liquidity into the debt market, Márton Nagy, central bank vice president, said on July 12. He said the aim is to keep the benchmark rate stable for an extended period to make the economic environment “predictable.”

“The benchmark rate’s significance will diminish in the coming months because there won’t be unlimited access to it from October, which will allow the central bank to reduce the effective interest-rate level without cutting the benchmark rate,” Takarékbank Zrt. economists, led by András Oszlay, said in an e-mail before the rate decision.

The forint has strengthened 0.7 percent against the euro this year and traded at 313.05 per euro this morning in Budapest.

The yield on the 10-year Hungarian government bond touched a record low 2.8 percent on July 14 and rose to 2.88 percent on Tuesday.

The central bank is working in concert with the government to boost economic growth after gross domestic product unexpectedly contracted in the first quarter from the previous three months.

The second-quarter expansion may exceed 2 percent and may accelerate further in the second half of the year, Barnabas Virág, central bank managing director, told Magyar Hirlap newspaper in an interview published on Monday.

Consumer prices dropped 0.2 percent in June. Policy makers target 3 percent inflation in the medium term.