Hungary opts to cut central bank base rate to 1.95% from 2.1%

By Jennifer Chiou

New York, March 24 – The Monetary Council of Hungary’s Magyar Nemzeti Bank announced that it voted to reduce the central bank base rate to 1.95% from 2.1% at its meeting on Tuesday. The change is effective on March 25.

Prior to this change, the bank last voted to cut the central bank base rate at its meeting on July 22, 2014. It decreased the rate by 20 basis points to 2.1% from 2.3%.

The council made the decision to leave the rate unchanged in both January and February.

According to a bank release, the monetary council decided to improve the flexibility of the inflation targeting regime after a scheduled review of the bank’s inflation target.

As a result, the council said it designated a plus or minus 1% tolerance band while maintaining the inflation target defined as a 3% rate of increase in the domestic Consumer Price Index.

The two-week deposit rate is also 1.95%, while the overnight central bank deposit rate is 0.95%.

The overnight collateralized loan rate stands at 2.95%, the bank said in another release.

The interest rate remunerated on required reserves is 1.95%, and the penalty interest rate applied in case of reserve deficit is the same figure, 1.95%.

The primary statutory objective of the Magyar Nemzeti Bank is to achieve and maintain price stability, the release noted.

Since 2001, the framework for meeting the bank’s statutory objective has been the inflation targeting regime.

The bank stated that the financial crisis has posed new challenges to monetary policy all around the world. The crisis highlighted that the shocks to the economy may be much greater than previously thought, and the probability of monetary policy being faced with constraints will not be negligible in the future.

Under the inflation targeting regime, central banks have moved towards greater flexibility and reformed their monetary policy instruments, the council said.

While maintaining the primary objective of price stability, flexible inflation targeting provides a framework where the central bank not only focuses on inflation in the short run but also takes into account other factors.

A plus or minus 1% tolerance band around the inflation target may contribute to increasing the flexibility of the framework, the bank said.

The time horizon relevant for the monetary council continues to be six to eight quarters.

The government’s economic policy may contribute to achieving and maintaining price stability through several channels. Keeping the government deficit at a stable and low level and further reducing debt, tax measures and changing administered prices in line with the inflation target help reduce the real economic costs of achieving and maintaining price stability, the council added.

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