The MNB unexpectedly cut the base rate and the effective sterilisation rate

HUNGARY - In Brief 23 Jun 2020 by Istvan Racz

---

Economists often fail to foresee policy events even for short term. They are normally much better at explaining the rationale of unforeseen policy steps... in hindsight. Somehow we feel to share this fate this time, at least as regards the first part of the foregoing statement.Against our - and also most other analysts' - expectation, on June 23, the MNB reduced the base rate and also the 1-week deposit rate by 15 bps to 0.75% today, leaving the O/N deposit rate and the O/N and 1-week credit rates unchanged at -0.05% and 1.85%, respectively. For the 1-week deposit rate, which is currently the effective sterilisation rate, the Monetary Council actually made a recommendation to the Executive Board to cut accordingly, but that is nothing else than administrative formality, and so the 1-week rate will be cut to 0.75% for sure.What it means is that the Monetary Council found the forint a bit too strong at EURHUF 345 compared to what the inflation situation would require, and they also found the economy too weak compared to their expressed wish to see GDP growth for this year in the positive 2-3% range, and so they have initiated a limited-size trade-off between currency strength and output growth. They actually said so, without mentioning the currency by name, as one would expect. They said that inflation prospects are less worrying than before, whereas the economy is too weak, and so they have decided to do some fine-tuning.Even after this measure, the MNB expects GDP to grow by 0.3-2% this year, so by less than they were predicting previously, claiming that GDP may fall by 7% yoy in Q2, which is supposed to be the bottom of the crisis in their view. At a press conference ...