Central Bank Makes its Decision on Interest Rates

The Hungarian Central Bank (MNB) will not continue its easing, as the monetary council kept the base interest rate at the same level at today’s interest rate decision meeting, which thus remains at 6.5 percent, reported VG.hu.

In September, in parallel with the US Fed’s initial interest rate cut, the Central Bank reduced the base rate by 25 basis points, however, it cannot be ruled out that in November the MNB will, similarly to this month, pause again.

The current decision meets analysts’ expectations, as MNB Vice-President Barnabás Virág indicated after the most recent interest rate decision that the central bank basically examines four areas:

• inflation processes,
• the interest policy of the major central banks,
• the risk assessment and the development of the trust of economic actors,
• stability of financial markets.

Of the four factors, there was a positive change in the first two. Although inflation may rise in the coming months due to base effects, it is still a fact that the rate of price increase aligned with the central bank target of 3 percent in September. In addition, the European Central Bank also reduced the base rate in October, also increasing the central bank’s room for maneuver.

However, despite the favorable inflation trends and interest rate cuts by major central banks, interest rate expectations related to the Fed shifted upwards. After the better-than-expected US labor market data announced at the beginning of October, investors expect the Fed to slow down the pace of interest rate cuts. Added to this was the danger of escalation of the situation in the Middle East and the expected market uncertainty due to the US presidential election. All of these encouraged the MNB to maintain interest rates.

In addition, the central bank could also be concerned about the weakness of the Hungarian currency, the forint (HUF). The exchange rate against the euro has been above the 400 level for weeks. Two factors play a role in this:

On the one hand, the conflict in the Middle East escalated at the beginning of the month, its effect appeared in the world market price of crude oil. In addition, market expectations regarding the Fed’s interest rate cuts also shifted upwards, otherwise than indicated by the central bank, which had a negative effect on the forint, among others, through the strengthening of the dollar.

According to the analyst, if the international financial market situation does not change radically, the mood does not improve or interest rate expectations change, then the forint exchange rate may remain above 400 in the long term.

Via VG.hu; Featured Image: Facebook MNB