The Monetary Council did not reach the interest rates, but they headed for a difficult situation, their communication reveals the most important.

As expected, current interest rate conditions were not changed by the central bank’s Monetary Council. The base rate remained at 0.6%, which was reduced in two steps, from 0.9% in June and July, where it had been since May 25, 2016.

For the moment, however, it is not the interest rate conditions that are really important, but the explanation and assessment of the situation by the Monetary Council an hour later, and the main data from the inflation report for September. Inflation has almost (up) left the central bank’s tolerance range of 2 to 4 percent, and the exchange rate of the forint against the euro has deteriorated above 360. In any event, the central bank should respond to the first evolution, if not otherwise, through communication. The central bank does not have an exchange rate target, but in any case it cannot do without a weakening of the forint, especially since the weakening of the forint makes imports more expensive and increases inflation.

In a difficult situation

“The MNB has headed for an increasingly difficult situation,” Lajos Török, chief analyst at Equilor Befektetési Zrt., Said at the company’s online press event. In this situation, you already have to find out where the central bank’s communication is going, what do you consider more important, the achievement of the inflation target of 3% or the economic recovery? – added Szilárd Buró, Head of Financial Innovation at Equilor Befektetési Zrt. Among regional competitors, the Hungarian economy had the weakest performance in the second quarter, with the biggest drop. The numbers for the third quarter will be important, they will show how much rebound it followed. However, there are many risks, the viral situation is not good at all, and although the government does not want to introduce restrictions similar to those of the spring, the epidemic alone is affecting the economy.

The MNB will directly support investments, if growth prospects permanently deteriorate, the FGS Hajra! and through the Growth Bonds Program, Equilor experts believe. This is because there is no room for further relaxation of monetary policy due to high inflation.

Stimulating the economy requires flexible monetary policy, but keeping high inflation (and the forint exchange rate) in check would require an adjustment. Based on past experience, it is not surprising that the Monetary Council led by György Matolcsy puts the aspects of economic recovery before the inflation target, so that the markets cannot wait for an adjustment, this will be assessed in advance: he previously explained the weakening from forint to hvg.hu Péter Virovácz, chief economist at ING. At the same time, according to ING, the central bank will now be paying attention to inflation; they expect a tighter tone from the central bank, which could strengthen the forint even near the 355 level.

The exchange rate of the forint also underperforms other regional currencies. According to Szilárd Buró, in the short and medium term it can gravitate around the current 360 in the short and medium term, gradually weakening – slow weakening is a long-term trend, not a novelty. A weak guilder is not a target, but it is not a disadvantage for the economy.

Matolcsy’s unsustainable optimism

Equilor expects a general economic recession of 5% this year, 4.5% next and 4% growth in 2022. Public debt as a percentage of GDP could rise to 75.9% by the end of the year, while the general government deficit could rise to 8 percent. At the moment, there are no more serious analysts, institutions in the world (including the Hungarian government, more precisely the Ministry of Finance), whose valid forecast would not predict a recession of more than one percent for the Hungarian economy by 2020.

The only exception is the eternally optimistic central bank, which in its previous inflation report did not even rule out (albeit weak) growth. This prediction had already deviated from reality at the time, but it became quite untenable given the second quarter bar data. It is a question of what new forecast the MNB will put on the table, knowing the governor of the MNB – György Matolcsy, the numbers will remain optimistic.



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