Hungary: Ultra-loose for too long ?

5 min

The Monetary Council (MC) of Hungary kept its key policy interest rate (3-month deposit rate; +0.9%) and the overnight deposit rate (-0.15%) again unchanged this week. Moreover, it announced that it will continue mortgage bond purchases and monetary policy interest rate swaps – additional easing measures introduced earlier this year – for an extended period. We do not believe that this ultra-loose policy stance is still necessary as growth is strong (+4.4% y/y in Q4; +4% in full-year 2017). Admittedly, inflation is still below the MC’s 3% target and has declined to +1.9% y/y in February from 2.6% in August 2017. However, this has been helped by a number of one-off effects, including (i) VAT rate cuts, (ii) lower fuel inflation, (iii) reductions in the corporate tax rate in 2017 and employers’ social contributions in 2018 that have offset rapid wage growth so far. We expect these effects to unwind over the course of the year, inflation to rise as a result to 3.3% by end-2018, and the MC to shift towards moderate tightening in H2. Should the latter not happen, then there is a risk of economic overheating.