MNI POLICY: Hungary Cenbank Weighs Proposed Benchmark's Impact

The National Bank of Hungary is weighing whether to press ahead with a 100-basis-points rate cut on Jan 30, amid concern it will have less room for future manoeuvre if a government proposal to use bond yields as benchmark for lending rather than the interbank loan rate goes ahead, MNI understands.

The implications of replacing the Budapest Interbank Forint Loan Interest Rate (BUBOR) with a much lower reference rate based on government bond yields are currently the subject of intense high-level discussions between Finance Ministry officials and the Hungarian Banking Association. The Hungarian National Bank called the plan “misguided” following the announcement Thursday.

Deputy governor Barnabas Virag hinted last week that the base rate, currently at 10.75%, could be cut by a whole percentage point, adding that current market pricing, which sees rates at 6-7% by the middle of the year, is realistic.

The Monetary Council opted to cut the base rate by 75bps to 10.75% before Christmas, although a 100bp cut was also on the table.

INFLATION SURPRISE

The MNB will be reluctant to deviate from a course that has seen it regain financial market confidence while steering rates towards the lowest interest level possible. But it will need to see more details of the government’s proposal to be able to assess the extent of any policy implications as they weigh up whether to proceed with a few months of bigger cuts before slowing, or to move in more moderate steps. (See MNI POLICY: Financial Stability Key For Hungary's Central Bank)

December’s downside inflation surprise - coming in 0.2% below central bank expectations at 5.5% - coupled with a broadly-balanced inflation outlook and stable market indicators, could support the case for a 100bps cut. Central bank officials will also feel that the forint, which traded at a three-month low following the surprise announcement over the lending benchmark, has benefited from the monetary strategy adopted over recent months.