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Free AccessMNI 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.
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.