BUDAPEST (Reuters) - Hungary’s base rate could remain unchanged until 2019 or even longer, central bank deputy governor Marton Nagy told Reuters on Tuesday, adding that inflationary expectations were anchored at a very low level despite strong wage growth.
The National Bank of Hungary (NBH) left its rate at a record low of 0.9 percent earlier in the day and said it intended to maintain the current level and loose monetary conditions “for an extended period.”
Nagy said analysts’ expectations in a Reuters poll that the base rate could stay unchanged until early 2019 was realistic.
“But I think that this can be even longer than that, even the end of 2019 or even 2020 but the market decides where it expects the base rate to go,” Nagy said at the Reuters Central & Eastern Europe Investment Summit.
Central banks in the European Union’s eastern wing have kept monetary policy loose for years.
Instead of focusing only on the base rate, Nagy said the NBH looks at overall monetary conditions, including interbank rates, short-term yields and implied forint yields on the swap market.
He noted that markets had priced out an increase in Budapest interbank rates over a one-year horizon after the bank communicated loose monetary conditions for an extended period.
Reducing the stock of the bank’s three-month deposits and currency swap deals have emerged as its main tools to curb market interest rates and make bank loans cheaper.
Nagy said that in order to maintain loose monetary conditions, the bank had to squeeze out about 300 to 400 billion forints of funds from its deposit tool into the economy each quarter by capping deposits and/or using its swaps to pump liquidity into the system.
Nagy also said that downward risks in inflation have strengthened since March.
“Inflation expectations are at historically-low levels and they have stayed there despite the wage rises,” he added.
“The inflation target is 3 percent, and there is a tolerance range around it, but here the lasting impacts matter. So if inflation rises above 3 percent in a lasting way, then this issue becomes interesting,” he added. The bank expects inflation to reach its target sustainably from the first half of 2018.
Nagy also said the bank would be closely watching when the European Central Bank starts tapering.
“Another important thing is whether the central banks of neighboring countries start (tightening),” he added.
“Our relative position within the region is important.”
Reporting by Krisztina Than and Gergely Szakacs; editing by Alexander Smith