The Monetary Council of the National Bank of Hungary (NBH) decided to keep the central bank’s base rate at 0.90% and the O/N deposit rate at -0.05% at a monthly policy meeting on Tuesday. The decision was in line with expectations.
In a statement released after the meeting, the council again noted the upside risk to inflation of strong domestic demand, contrasted with the downside risk of weakening external activity, but said “downside risks have strengthened” with regard to persistent inflation trends.
“Lower-than-expected underlying inflation data for recent months and the ongoing deterioration in external activity indicate strengthening in downside risks to the longer-term inflation outlook,” the council said. It noted that the NBH’s measure of core inflation excluding indirect tax effects, a bellwether indicator of underlying inflation, had fallen to 3.2% in July, while inflation of industrial goods as well as services had slowed. “Persistent inflation developments were overall lower even than expected,” the policy makers said, reiterating that core inflation excluding indirect tax effects “is likely to decline gradually to 3% from the end of 2019”. The council acknowledged a deterioration in sentiment on international financial markets since the previous monthly policy meeting, mentioning also the impact of trade policy developments, central bank measures, domestic political tensions in Italy and news on Brexit. The council repeated that it “applies a cautious approach” to monetary policy decisions, and that future developments in the outlook for inflation would be “a decisive factor in the necessity of further measures”.
Factors impacting the outlook for inflation include the spillover of disinflationary effects of a slowdown in Europe, changes in the monetary policies of the world’s leading central banks, the effect of the new Plus retail government security on savings, and the economic consequences of counter-cyclical fiscal policy, the council said.