MNB policy-makers maintain base rate; raise gold reserves tenfold

Besides leaving the base rate on hold, the Monetary Council also left the O/N central bank deposit rate at -0.15% and the O/N collateralized loan rate at 0.90% at the meeting on Tuesday, state news wire MTI reported.

The Council has left the base rate on hold since signalling an end to an easing cycle at a policy meeting in the spring of 2016. However, rate-setters have made use of "unconventional, targeted" instruments to ease monetary policy further. 

At the previous policy meeting in September, the Council said it was "prepared for the gradual and cautious normalization of monetary policy, which will start depending on the outlook for inflation," and announced changes to its policy instruments. These included decisions to phase out the three-month deposit, earlier the central bankʼs main sterilization instrument, and to wind up tenders for monetary policy interest rate swaps (MIRS), as well as its mortgage bond purchase program.

The MNB also decided to launch a HUF 1 trillion program to "raise the proportion of long-term, fixed-rate lending to SMEs to an adequate level," dubbed "FGS fix," early in 2019. 

In a statement released after the meeting on Tuesday, the Council reiterated its earlier policy stand, adding that the inflation target is still expected to be achieved in a sustainable manner from mid-2019. To ensure this, in the Councilʼs assessment, maintaining the current level of the base rate and loose monetary conditions is necessary. 

Addressing decisions taken at the previous meeting, the Council noted that mortgage bond purchases on the secondary market had ended, and that purchases on the primary market would finish by the end of 2018, as MIRS tenders are also phased out. In future, mandatory reserves will be the central bankʼs main policy instrument, while the stock of swap instruments providing forint liquidity and the interest rate corridor will be optimally combined to ensure the mid-term inflation target is achieved in a sustainable manner, it added.

The Council noted that sentiment on international financial markets had deteriorated since the previous policy meeting and said the current "volatile" environment on global markets "continues to suggest a more cautious approach."

Central bank raises gold reserves

Also on Tuesday, MNB policy-makers decided to raise the central bankʼs gold reserves from 3.1 tonnes to 31.5 tonnes, "considering the long-term goals of national and economic strategy."

The MNB bought gold for the first time since 1986 and raised the reserves to a level not reached in 70 years. Physical delivery of the gold to Hungary took place in the first half of October, it added.

"Possession of the precious metal within the country is in line with international trends, supports financial stability and can further strengthen market confidence in Hungary," it said, adding that no investment considerations underlie the possession of the reserves.   

"Gold has properties which strengthen confidence during normal periods, too; that is, it doesnʼt just fulfill a role of stabilizer and line of defense in an environment of extreme market conditions, during structural changes to the international financial system or serious geopolitical crises," the MNB explained.

The value of the gold reserves stands at about USD 1.24 bln, at current prices. The share of gold reserves in the central bankʼs international reserves has risen to 4.4%, which is in line with the average for non-eurozone countries in Central and Eastern Europe, the central bank noted.  

The latest data from the World Gold Council, the market development organization for the gold industry, show that gold accounted for 0.2% of international reserves of the Czech Republic, and 3.8% of the international reserves of Poland. The ratio was 27.0% for Slovakia, 10.0% for Romania, and 14.3% for Slovenia.