Aggressive loosening step came from the MNB today

HUNGARY - In Brief 22 Mar 2016 by Istvan Racz

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At today's scheduled monthly rate-setting meeting, the MNB cut the base rate by 15 bps to 1.2%, and in addition it reduced the O/N interest rate corridor to -0.05 to 1.45% from the previous 0.1-2.1%. Besides, it said as a conclusion of its quarterly inflation report that average CPI-inflation is only likely to reach 0.3% this year, and it will probably not recover to the 3% medium-term target over the whole forecast period (the next 24 months), but it will only likely get close to it in H1 2018 (reach 2.8% in Q1 2018 more specifically). And then the MNB said that interest rate cuts will continue until monetary conditions get in line with the medium-term achievement and sustainability of its inflation target, adding that from now on, the Monetary Council will decide on the O/N interest rate corridor as well, in addition to the base rate, at its monthly rate setting meetings. Well, this is quite aggressive, and a big change of policy indeed. As we said already in our recent monthly report, there is rarely a clearer case for monetary easing than the current one, and so a significant easing step is no surprise. But the actual step was quite big. Previously, the MNB said it would only resort to a base rate cut later, and only if the non-conventional measures it was considering have proven to be insufficient. Adjusting the interest rate corridor was mentioned as a possible early measure, but the size of the cut in the O/N credit rate - which is expected to be increasingly powerful as bank liquidity is getting squeezed as a matter of policy - was rather big. And finally, the Bank has almost promised in today's communiqué that rate cuts (in the base rate or in O/N rates) will ...