MNB vice governor says another base rate cut is likely in July

HUNGARY - In Brief 26 Jun 2020 by Istvan Racz

---

MNB vice governor Barnabás Virág spoke in a radio interview this morning. He expressly said he would propose another 15 bps reduction of the 0.75% base rate at the next rate-setting meeting of the Monetary Council on July 21. He also added that this will be the last cut, as the MNB, unlike other central banks in the CEE region, wants to keep distance from zero percent in terms of the base rate. This means the Bank has not started and does not want to start a new rate-cutting cycle. "It is not an option and not possible" to go below the 0.6% level, which is just right for the purposes of supporting economic recovery and strengthening financial stability, Mr. Virág said. He also added that the Bank saw exaggerated further rate-cut expectations in market pricing in recent days.In our view, this means the Bank still believes that the currency is too strong at EURHUF 350-355 and that it would be happy with the exchange rate moving closer to EURHUF 360. The latter is the same level which we have thought for a while would still keep CPI-inflation safely below 4% (the tolerance ceiling) for the rest of this year.As regards exaggerated rate-cut expectations, although the Bank said earlier this week that the 15 bps cut in the base rate, to 0.75%, was a one-time action, the market may not have believed this fully, because simultaneously, the new inflation report still included an ambitiously optimistic positive 0.3-2% GDP growth forecast for this year, which could not be achieved without a significantly looser monetary policy (and looks somewhat unrealistic anyway). We do not think that the MNB's (overly) optimistic forecast should be construed as any kind of a target, yet we bel...