Another 15 bps cut by the MNB, further small reduction promised

HUNGARY - In Brief 23 Jun 2015 by Istvan Racz

---

The MNB reduced its base rate by 15 bps to 1.5% today, just as widely expected. Including this measure, the MNB has cut the base rate by a full 60 bps in equal steps over the past four months. The forint received this news quite negligently, hovering around EURHUF 310, which essentially represents the continuation of the strong trend of recent days, in a great part due to improvements achieved at talks between Greece and its creditors. Given the unsurprising nature of today's move, the MNB's forward guidance following its interest rate measure appears more interesting. This time around, the Bank's outlook was given in the Monetary Council's comments attached to the new quarterly inflation report, which the Council discussed at today's meeting. In these comments, the Council's conclusion is that "achieving the inflation target in the medium term points to the direction of further small interest rate reduction", "points to" most probably meaning "requires". The full report will be published on Thursday, June 25. So far, the MNB has said that it sees average CPI-inflation at 0.3% in 2015 and 2.4% in 2016, together with GDP growth rates of 3.3% and 2.5%, respectively. Today, 3-12 months government debt traded at 1-1.03% yields, deeply below the MNB's 2-week deposit rate, and international reserves reached EUR 37.1bn at end-May, up EUR 2.5bn from the start of this year. Based on this and other information, we expect the MNB to cut its base rate further by 10 bps in late July, and continue with similar 10 bps cuts in August and September, assuming reasonably favorable developments on Greece and no major adverse changes in the international and domestic environment in the com...