The MNB reduced the base rate but also ended its recent easing cycle on July 21

HUNGARY - In Brief 22 Jul 2015 by Istvan Racz

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In our monthly report of July, we predicted that at the Monetary Council's next meeting, the MNB would end its most recent series of base rate cuts, which was started in March from 2.1% and was carried out in 15 bps steps over four consecutive months since then. This was in the face of an average market expectation of another 10 bps rate cut in July, possibly followed by a further similar step in August. In reality, both views have proven right and wrong at the same time. At its July 21 meeting, the Monetary Council decided to cut the base rate by another 15 bps to 1.35%, which is by the way the lowest base rate the MNB ever had in its 91-year history. But after the meeting, governor Matolcsy told a press conference that the most recent rate-cutting series is over, and the base rate will now be held at its new level for a long time. He said he does not expect the level of the base rate to be affected by the MNB's shift from the current 2-week deposits to the new 3-month deposits, as the Bank's main sterilization instrument, announced for late September. Finally, he also said that in line with previous MNB communication, the Bank's zero-interest refinancing loan program (FGS/FGS+) will be ended in December 2015. An immediate proof that a number of market players expected rate cuts to continue in August was a moderate strengthening of the forint in the wake of yesterday's MNB decision, by less than 1%, to EURHUF 307. However, the relatively small size of this impact suggests that the surprise was not that big after all. Just briefly on the details, we predicted - and in fact suggested - ending the rate-cutting series because: - CPI-inflation has been recovering rapidly f...