MNB has strengthened its easing bias

HUNGARY - In Brief 26 Jan 2016 by Istvan Racz

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In general, we are not the kind of people who prefer deriving the likely course of monetary policy from Monetary Council talk to looking at what the MNB is actually doing in its everyday regulation of the money market and, indirectly, the HUF exchange rate. But today, the Monetary Council, which left the base rate at 1.35% at its regular monthly rate-setting meeting as expected, has changed its language in a way that is important because it is likely to give rise to market speculation. This means speculation that another base rate cut might be possible in the forthcoming months if external conditions, including ECB measures would require so. Indeed, the Monetary Council repeated in its communiqué that the existing level of the base rate and current monetary conditions are consistent with the achievement of the Bank's inflation target target in the medium term (= the next 24 months). Then it made reference to the most recent non-conventional measures, which were announced earlier this month, saying that they have already helped to reduce long-term government bond yields, and are likely to contribute to further loosening of monetary conditions. But then the communiqué says that if external conditions, including ECB policy justify, the MNB may take additional measures to ease monetary conditions further, primarily through its existing set of non-conventional tools. Well, at this point, analysts are likely to point out that 'primarily' does not mean 'exclusively', and so speaking this way, the MNB is in fact reopening the way towards another base rate cut. This is true, of course. However, we would say that another rate cut could only come if external conditions indeed tak...