Hungary Stays on Path to Monetary Tightening as Prices Rise

(Bloomberg) -- Hungary’s central bank left its monetary policy unchanged, staying on a path toward eventually ending ultra-loose monetary policy as it assesses the need to curb brewing inflation pressures.

Rate setters left all interest rates unchanged Tuesday and repeated signals that they were closely monitoring core inflation data to decide on when to start winding down years of stimulus. Analysts expect the central bank to commence monetary-policy tightening in March, when they’ll review their stance based on updated economic forecasts.

While central banks from London to Prague raised borrowing costs last year to combat inflation, policy makers in Budapest have stuck to unconventional tools and record-low interest rates to help boost lending and stimulate economic growth. In recent weeks, Hungary’s monetary authority has been signaling the first tightening measures may be around the corner.

"The Monetary Council is prepared for the gradual and cautious normalization of monetary policy, which will begin depending on persistent inflationary developments," the central bank said in a statement. "Core inflation excluding indirect tax effects is likely to continue to rise in the coming quarters."

The recent shift toward a hawkish message illustrate the latest disconnect with a continent that’s facing slower growth and inflation. The European Central Bank said last week that risks to the economic outlook had moved to the downside. Czech rate setters, who hiked borrowing costs five times in 2018, have also shifted to a more cautious approach, while Poland sees its benchmark staying at a record low possibly until 2020.

But in Hungary, the tight labor market is pushing up wages, which in turn is leading to consumers spending more and helping drive price growth. Earlier this month, Deputy Governor Marton Nagy said core inflation excluding the effect of indirect taxes, policy makers’ favored measure for long-term inflation, could exceed 3 percent sometime in the first three months of the year, which would be a strong signal that tightening was needed.

On Tuesday, rate setters said domestic price pressures would be more important in determining the future policy path than external developments.

The first step to cool the economy would be the unwinding of unconventional easing measures that have pushed interbank rates below the benchmark rate, now at 0.9 percent.

Hungary Stays on Path to Monetary Tightening as Prices Rise

Most analysts expect the central bank to start reducing the volume of foreign-currency swaps used to inject liquidity into the economy from 2 trillion forint ($7.22 billion) starting in March. They are more divided on whether the Monetary Council will raise overnight rates that month or only later.

"While the National Bank of Hungary seems to be keen to start normalizing its ultra accommodative monetary policy, the external backdrop is not particularly conducive to do so," said Piotr Matys, a strategist at Rabobank in London.

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