Hungarian central bank holds rates, acts to boost liquidity

Hungary's central bank launched new measures to boost liquidity on Tuesday and said inflation would drop below its 3% target in the coming months due to the fallout from the coronavirus pandemic which will dent economic growth this year. The Monetary Council left interest rates on hold and decided to introduce a new fixed-rate collateralised loan instrument. Lending will be provided at a fixed interest rate by the National Bank of Hungary with unlimited liquidity.

The NBH also released domestic counterparty credit institutions from the reserve requirement with immediate effect. "To address the challenges posed by the pandemic, it is key to ensure the required level of liquidity. In order to preserve effective monetary policy transmission, the Monetary Council is ready to take further measures to provide additional liquidity," the rate-setting Monetary Council said in a statement.

The bank expects inflation to slow to 2.6-2.8% this year, below its previous forecast. It said the economy would slow in the first half of this year but then rebound later. nS8N2B2063 "The bank for the time being focuses on providing sufficient liquidity for the banking system and the markets, and has not yet decided on bond buying in the secondary market," CIB analysts said in a note. The National Bank of Hungary (NBH) has already boosted short-term market liquidity via its FX swaps and broadened the range of permissible collateral with corporate loans, helping the country's banks. The government has imposed a blanket moratorium on all loan repayments through end-2020.

In Central Europe, the Czech, Polish and Romanian central banks have cut interest rates to help economies as recession fears escalated. The pandemic has wrought havoc on the global economy, prompting big car makers to halt production at their factories in Hungary. The NBH has said it would consider resuming its mortgage bond buying programme to curb borrowing costs.

In a March 16-19 Reuters poll, 13 of 15 economists said the NBH would leave its base rate steady at 0.9%. One analyst projected a 10-basis-point reduction, another expected a 15-basis-point cut. The forint, which sank to record lows near 360 versus the euro last week, traded around 352.51 after the rate decision on Tuesday, and eased to 354.80 after the bank's comments.