The National Bank of Hungary (MNB) improved its GDP forecast in its latest inflation report released today, while inflation is expected to be lower than projected this year.
The central bank now sees 3.9% GDP growth in 2017 and expects the momentum to carry through to next year. Growth is only forecast to slow down in 2019, when the GDP will grow an estimated 3.2%.
Annual inflation in 2017 at 2.3% could be slightly lower than the 2.4% previously projected, but is expected to pick up as the central bank expects 2.5% next year and 2.9% in 2019.
MNB to maintain loose monetary conditions
In the Monetary Council’s assessment, maintaining the loose monetary conditions for an extended period are necessary to achieve the inflation target in a sustainable manner, the report said.
The gradual limitation on the stock of three-month deposits has fulfilled its role and the HUF 75 billion year-end upper limit on the stock will not be reduced further. In line with maintaining monetary conditions, the Council set a HUF 400-600 billion band for the targeted average liquidity crowded-out for the first quarter of 2018, which is equal to that of the fourth quarter of 2017. On the next occasion, the Council will decide on the amount of liquidity crowded out in March 2018 and will adjust the stock of central bank swap instruments accordingly.
The Council’s aim is that the loose monetary conditions have their effect not only at the short but also at the longer end of the yield curve. To ensure this, in November, the Council decided to introduce two unconventional instruments from January 2018, which will constitute an integral part of the Bank’s set of monetary policy instruments. In harmony with the Council’s forward guidance the new instruments contribute efficiently to the maintenance of loose monetary conditions over a prolonged period. Accordingly, the Council will introduce unconditional interest rate swap (IRS) facilities with five and ten-year maturities, the maximum allotted amount of which has been set at HUF 300 billion for the first quarter of 2018. In addition, the ?NB will launch a targeted programme aimed at purchasing mortgage bonds with maturities of three years or more.
The Council expects an increase in mortgage bond issuance and an improvement of market activity due to the measure. The maximum allotted amount for the security purchase programme amounts to 50 per cent of the ever-prevailing mortgage-bond stock on the market. Both programmes will contribute to an increase in the share of loans with long periods of interest rate fixation, thereby improving financial stability. After several rounds of consultation with banks, the MNB will make a decision on the operational details of the programmes until December 22, 2017 and will inform market participants in a release.
The inflation target is expected to be achieved in a sustainable manner by the middle of 2019. In the Council’s assessment, maintaining the base rate and the loose monetary conditions at both short and long ends for an extended period is necessary to achieve the inflation target in a sustainable manner. The Council will closely monitor developments in monetary conditions and will ensure the persistence of loose monetary conditions over a prolonged period by using the extended set of monetary policy instruments.
