November 24, 2020

POLL-Hungary central bank to keep rates steady as pandemic boosts prices

By Gergely Szakacs

BUDAPEST, Sept 17 (Reuters)The National Bank of Hungary (NBH) is likely to leave interest rates unchanged next Tuesday based on a Reuters poll of economists, with higher-than-expected inflation limiting room for further meaningful stimulus for the sagging economy.

All 14 analysts in a Sept. 15-16 survey said the central bank would leave its base rate at 0.6% HUINT=ECI after 30 basis points worth of cuts in June and July to shore up the economy hit by the COVID-19 pandemic.

Central bank sources told Reuters last week that Hungary’s recovery would be slower than previously expected and the bank was nearing its limits with tools to fuel the economy, which shrank by 13.6% in the second quarter.

Banks expect to incur hundreds of billions of forints in losses as the pandemic had reversed a steady improvement in loan books over the past years.

After a recent surge in new infections, Prime Minister Viktor Orban’s government is walking a tightrope between necessary restrictions and preventing further harm to the economy.

“The economy will bounce back easily from a very low base on an annual basis next year, however, it is not sure that we will reach pre-COVID crisis levels by the end of next year,” said economist Eszter Gargyan at Citibank.

“The National Bank of Hungary cannot really do much more to stimulate the economy.”

Headline inflation hit 3.9% year-on-year in August, near the top of the bank’s 2% to 4% target range, while tax-adjusted core inflation, its preferred measure, rose to 4.2%.

Deputy Governor Barnabas Virag said last week that the pandemic had lifted inflation and there was no room to lower the base rate further.

The central bank will publish new economic forecasts on Tuesday, including a likely sharp downgrade to its 2020 gross domestic product outlook. Economists polled by Reuters see a 5.5% fall this year, followed by a 4.7% rebound in 2021.

Inflation is seen edging down to 3.2% in the next two years from an eight-year-high of 3.5% projected for 2020.

“The NBH will rather focus on the inflation story, but just using words and not actions,” ING economist Peter Virovacz said.

(Reporting by Gergely Szakacs Editing by Tomasz Janowski)

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