Hungary’s Central Bank Meets After Unconventional-Easing Misfire

Hungarian monetary policy makers will meet on Tuesday after initial efforts to push long-term interest rates lower misfired in their latest round of unconventional easing.

After years of steering the domestic market, the bank is now fighting the tide of global reflation as it tries to lower the country’s long-term borrowing costs. The National Bank of Hungary’s Monetary Council scrambled to adjust its swap tender process this month after investors were initially underwhelmed by its newest push into swap markets and a dovish stance that’s increasingly at odds with a global trend of rising interest rates.

Policy makers will keep their benchmark rate unchanged at a record-low 0.9 percent at 2 p.m. in Budapest, according to all economists in a Bloomberg survey. Investors’ main focus will be on rate setters’ comments on the yield curve in a statement an hour later.

"This is the first time they’ve hit an obstacle of this magnitude," said Gergely Palffy, an analyst at Raiffeisen Bank in Budapest. "There’s skepticism in the market as to whether the program will be as successful as the central bank had initially planned."


Hungary is looking to lower long-term rates at a time when the European Central Bank is moving closer to pulling out of a bond-buying program that at its peak helped drive borrowing costs to record lows across the continent. Last month, Hungarian rate setters hailed their November announcement of the new swap instruments and a mortgage-bond purchase program for "significantly" reducing long-term borrowing costs. But since then, yields have failed to resist an increase in European markets.

Five-year German yields rose above zero for the first time in two years on Monday, pushing 10-year rates in Budapest to the highest since November. The difference between Hungary’s 10- and two-year yields has widened 26 basis points since the last rate meeting, more than the 22 basis-point increase for Romanian debt, 15 basis points for German bunds and 8 basis points for Czech debt. The Polish curve steepened 28 basis points.

Long-term yields in the European Union’s east have traditionally moved in lock-step with developed markets, according to research by Bank of America Corp. strategist Gabriele Foa.

"Despite the market focus on the country story, core rates have historically been a strong driver of central and eastern European curves," said Foa, who recommends investors bet on a steepening in the two to 10 year part of the curve. "Steeper core rates suggest current levels are hard to support."

Even as investors anticipate a shift to tighter policy across Europe, Hungary’s central bank will likely reiterate a commitment to keep policy loose for an extended period. Record-low borrowing costs and an expanded toolkit need to stay in place until mid-2019 to achieve a 3 percent inflation target, Governor Gyorgy Matolcsy said in an interview this month.


By comparison, Czech policy makers will probably hike for a third time in less than six months on Thursday, according to a Bloomberg survey. Romania’s central bank will assess the need for another increase after it raised its benchmark rate earlier this month. Polish rate setters, who have kept borrowing costs unchanged for almost three years, will also meet on Feb. 7.

"The National Bank of Hungary’s current ultra-loose monetary policy stance continues to look out of sync with the broader macroeconomic backdrop and with some of its central and eastern European peers," said Nora Szentivanyi, an analyst at JPMorgan Chase & Co. in London. "Yet we do not expect a change in this stance anytime soon."