Hungary central bank to keep rates steady; next hike may be beyond 2020

BUDAPEST: The National Bank of Hungary is widely expected to keep interest rates unchanged next Tuesday, and a decline in local inflation and a dovish turn by global central banks may enable it to put off its next rate increase until after 2020.

All 16 analysts in an Aug. 21-22 Reuters poll said the NBH would leave its base rate at 0.9% at its Aug. 27 meeting. All 13 economists who gave a forecast for the overnight deposit rate said it would remain minus 0.05%.

The bank has said its base rate would remain unchanged for the foreseeable future and any necessary adjustment of monetary conditions would be implemented through changes in the overnight deposit rate or tools designed to adjust market liquidity.

The NBH raised the overnight rate by 10 basis points in March in what it called a "one-off" move justified by inflation trends.

In the July poll, economists forecast Hungary's overnight deposit rate would return into positive territory some time next year, with about 10 basis points of increases pencilled in.

However, the current median projection of six analysts who gave a forecast for the overnight deposit rate next year shows no change from minus 0.05%.

"We had previously expected a very slow increase in interest rates next year. However, this could be postponed due to the changes in the global environment," said Eszter Gargyan, an economist at Citigroup.

"There could be a dovish turn in September, when the bank issues its revised inflation forecasts and they will also want to see how the European Central Bank moves. The August statement may contain a very mild indication of this dovish shift."

The Federal Reserve, which sets the tone for monetary policy globally, cut rates by 25 basis points at its last meeting, but was anything but unanimous on how to respond to slowing growth in the US economy.

The European Central Bank is widely expected to cut rates by at least 10 basis points when it meets next month and may flag a fresh round of asset purchases to boost economic growth and below-target inflation in the euro zone, Hungary's main trading partner.

Hungarian core inflation, which hit the top of the NBH's 2% to 4% target range in May, retreated to 3.7% by July. Last month, the bank said data since its June meeting confirmed its view of an expected decline in inflation from the end of this year.

"The increasingly dovish external backdrop and soft domestic CPI developments recently are lending the National Bank of Hungary a helping hand to justify continued monetary accommodation in Hungary," Mai Doan, an economist at Bank of America Merrill Lynch, said in a note.