Hungary Vows ‘Safe Distance’ From Zero Rates After Another Cut

(Bloomberg) -- Hungary’s central bank looked to assure investors that it won’t join Europe’s rush toward zero interest rates after it cut its benchmark a second time in as many months.

The rate-setting Monetary Council on Tuesday reduced the benchmark by 15 basis points to 0.6%, in line with the majority of estimates in a Bloomberg survey. Policy makers signaled that they may stop there to shield local assets from heightened volatility during the coronavirus crisis. At the height of the pandemic’s first wave, the central bank was forced to hike borrowing costs to arrest a currency slide.

“In the current rapidly changing environment, it is key to maintain short-term yields at a safe distance from a range close to zero,” the rate-setting panel said in a statement. The 0.6% level “supports price stability, the preservation of financial stability and the recovery of economic growth in a sustainable manner.”

The statement reinforces an earlier message from Barnabas Virag, who took over as deputy governor in charge of monetary policy in May and flagged a reduction to 0.6% this month, which he said would be the bottom.

Virag’s clear guidance for this month’s decision, despite still-volatile financial markets, reflects a shift in steering investor expectations after years in which his predecessor kept decisions largely to himself and preferred other monetary easing steps.

‘No More’

The economy’s trajectory and markets have backed the central bank’s new approach. Inflation remains at the 3% target and the forint has traded in a narrow range against the euro.

In addition to the rate cut, the central bank said it would purchase “limited amounts” of government securities with at least 15 years maturity, in order to help monetary transmission in the longer-end of the yield curve. Any purchases will continue to be done only as needed and constitute a “safety net” for the economy, policy makers said.

“Markets currently expect no more cuts from MNB, and we concur with this view,” Erste Group Bank AG economist Zoltan Arokszallasi said in an emailed report. “We think further easing would only be possible if the global sentiment improved further.”

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