Hungary Central Bank Cuts Base Rate Again

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Hungary’s central bank slashed its key interest rate in July, for a second policy session in a row after lowering it for the first time in over four years in the previous month, in a bid to support growth and inflation amid the slump caused by the coronavirus, or Covid-19, pandemic.

“At its current policy meeting, to maintain price stability and to support the restoration of economic growth, the Monetary Council reduced the base rate by 15 basis points to 0.60 percent,” the Magyar Nemzeti Bank said in a statement on Tuesday.

The previous change in the rate was a similar size reduction in June, which was the first lowering since May 2016.

“In the Monetary Council’s assessment, the 0.60 percent base rate supports price stability, the preservation of financial stability and the recovery of economic growth in a sustainable manner,” the bank said.

“In the current rapidly changing environment, it is key to maintain short-term yields at a safe distance from a range close to zero.”

Policymakers left the overnight deposit rate unchanged at -0.05 percent, and the overnight and the one-week collateralised lending rates at 1.85 percent.

The bank said it will deliver additional stimulus through its targeted tools – the Funding for Growth Scheme and the Bond Funding For Growth Scheme – to boost investment, if there is a persistent deterioration in the growth outlook.

The effects of the June interest rate cut appeared persistently in the shorter segment of the yield curve, while it is essential that the effect must be felt in the longer segment of the yield curve as well, the MNB said.

The Council decided to purchase limited amounts of government securities in the segment of over 15-year maturities, to facilitate a reallocation between its instruments. This measure is expected to improve the transmission of monetary policy and support an extension in the maturity structure of government debt.

The Hungarian economic performance this year is likely to be more subdued than earlier expected, while the outlook for inflation has shifted downwards persistently, the central bank said.

The bank forecast growth to be 0.3-2.0 percent this year, 3.8-5.1 percent in 2021 and 3.5-3.7 percent in 2022.

Budget deficit and public debt are expected to rise this year due to the cost of the Covid-19 containment measures and the economic slump.

Core inflation excluding indirect tax effects is expected to stand at 3.3-3.5 percent this year and at 2.6-2.7 percent in 2021.

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