Important policy statement from the MNB

HUNGARY - In Brief 16 Jan 2019 by Istvan Racz
Speaking at the Euromoney conference in Vienna, MNB vice governor Nagy said that in case their 'core inflation adjusted for the impact of changes in indirect taxes' indicator reaches or exceeds 3% yoy, the MNB will conclude that inflation has reached the Bank's medium-term target on a sustainable basis. He suggested, according to Reuters, that in this case the MNB should consider to start monetary tightening. Mr. Nagy also said reportedly that this might happen already in Q1 2019, but the Bank intends to wait with any further action until it has actually taken place.Commenting on how the Bank sees its potential next steps towards the 'normalisation' of monetary policy, he said that first liquidity should be reduced through cutting the outstanding stock of FX swaps, and second the Bank could start to adjust its interest rate corridor around the base rate.This sounds a rather strong statement indeed, especially compared to the usual way of the MNB. Apparently, the MNB was negatively impressed by the jump by their adjusted core inflation measure to 2.9% yoy in December, as reported yesterday. This was the correct reaction by the MNB in our view. What Mr. Nagy reportedly said about the Bank's approach to inflation and their possible next steps is not really new. The novelty is in the timing (the promptness) of their reaction.A little bit of caution is due, however, as we have not heard the exact words he said at the conference. But it seems obvious that should adjusted core inflation reach 3%, they would expect it to continue its uptrend later on (again correctly so). Anyway, Mr. Nagy's comments can be regarded as definitely forint-positive, and this may have been easily a...

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