INSTANT VIEW - What does the market make of vapid Hungarian monetary policy?

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Liam Carson, Capital Economics, London

“Today’s decision by the Hungarian MPC to leave its key interest rates unchanged is almost certain to be accompanied by a dovish statement (due at 2pm GMT) as policymakers attempt to temper the recent rise in bond yields. But we suspect the MPC won’t announce any further measures to - or give any strong hints that it plans to - loosen policy further.

“The Council is likely to be perturbed by the recent rise in bond yields. Last month it launched two unconventional measures - a mortgage bond purchase programme and a set of five- and ten-year interest swaps - with the explicit aim of reducing yields on long-term local currency debt. However, these policies have been unsuccessful. Yields at the long end of the curve have risen markedly, and by more than elsewhere in Central Europe.

“We’ve argued for a long time that policy is too loose given the stage of the economic cycle. And it appears that investors are now starting to share our concerns about the long-term outlook for inflation and interest rates. The statement is likely to double-down on its dovish rhetoric in an attempt to flatten the yield curve. That said, recent comments from policymakers suggest there is little appetite for further unconventional easing.

“For our part, we think rapid wage growth will push inflation above the central bank's 3% target around mid-2018. Our central view is that this will prompt the MPC to rein in its unconventional measures in the second half of the year and then raise its policy rate towards the end of 2018. However, there’s a real risk that policy is kept too loose for too long."

Gergely Ürmössy / Orsolya Nyeste, Erste Bank, Budapest

“In its statement published later, the council again reinforced its strong commitment to the sustenance of current loose monetary policy stance for a prolonged period. Regarding inflation developments, the wording remained dovish, as well, as the statement reiterated that the 3% mid-term CPI inflation goal would only be reached in 2019.

“As for non-conventional monetary policy measures, the central bank reiterated that they will continue mortgage bond purchases and the monetary policy interest rate swap facility as programs. They continue to focus on the relative position of domestic long-term yields relative to international yields when evaluating the program. According to the council, long-term yield spreads rose, due to turbulences on global markets seen recently, however they added that over a longer horizon spreads relative to the euro area and the region decreased.

“We continue to see that the next rate-setting meeting could be of more importance, as the new economic projections of the central will also be published. Our rate forecasts have not changed after today’s meeting. We expect interbank rates to remain at current levels throughout 2018 (currently: 3M BUBOR at 0.02%, 6M BUBOR at 0.04%), and in addition, we do not foresee the start of interest rate environment normalization before the second half of 2019. However, a lot depends on global inflation developments and possible changes of the ECB’s monetary stance."

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