Historic low base rate again

Hungary’s central bank  (MNB) cut the base rate by 15 basis points to an all-time low of 2.70% yesterday.  This was quite unexpected since nearly every economic analyst  had thought the reduction would be 10 bp and nobody predicted a 15 bp cut. 

Base rate in Hungary

The Hungarian Forint  went to 310.5 HUF/EUR after the announcement and today it has depreciated further.


Economy Minister Mihály Varga said before the decision yesterday that  he “trusts the MNB will act responsibly in view of the current situation ” (that is the weak level Forint is at)   He added that “we’re in the 310 HUF band now despite Hungary’s good and stable economic fundamentals and an external market shock may send the forint in the 320 or 330 band, though this would mean business as usual at least domestically “.

A lower base rate is certainly good for Hungary’s economic recovery and for increasing exports, besides it also  reduces Hungary’s debt payment burden, but (mainly because of the very high FX loan exposure Hungarian households have) it carries a lot of risk, too.  I keep my fingers crossed since our central bank now is skating on thin ice.

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  1. Voice of reason

     /  01/04/2014

    Shows how little you understand economics.

    A weak exchange rate may mean exports become more valuable in forint terms, but also means that imports – such as fuel and raw materials become more expensive. And luxury goods that people like to have, such as computers and smart phones.

    The forint has devalued from 270 to 310 forints to the Euro since Matolcsy took over. Thats a 13% increase in the value of foreign denominated loans.

    A low interest rate means that those who save get little or no return on their savings.

    Most countries use more meaningful statistics like GDP growth as a measure of economic success. Here Hungary is showing very mediocre performance. Projected growth of 1.6%, mostly thanks to EU financed construction projects is hardly something to be proud of, compared to countries like Romania and Poland. (5% in Romania).

    While such statistics clearly impress the ignorant Hungarian electorate, they don’t impress those who understand basic economics.


    • I am certainly aware of that imports will become more expensive if Forint gets weaker. The question is if the boost in exports would supercede this effect or not. FYI, that seems to be clearly the case: “In January 2014, the exports of external trade in goods in EUR terms increased by 2.8%, while imports were unchanged compared to January 2013. ”
      That’s because there’s serious “deleveraging” happening in the Hungarian economy now ( http://en.wikipedia.org/wiki/Deleveraging )…. which accidentally decreases Hungary’s potential GDP growth.

      “A low interest rate means that those who save get little or no return on their savings.”

      Indeed. (The historic low inflation rate eases their pain though.) And in Hungary’s current situation it’s more important that we have to pay less interest to our foreign debtors.

      “Projected growth of 1.6%”

      The European Commission projects 2.1% at the moment: http://ferenckumin.tumblr.com/post/80662247681/gdp-growth-projections-for-2014-how-the-story-changed
      Quite a few economic analysts, such as the London-based Capital Economics, forecast more (2.5%)

      Do you consider yourself someone “who understands basic economics”? 😉


  2. I’m pleased with the recent devaluation of the forint. The straight-jacket of foreign denominated, and foreign owned debt has prevented Hungary reducing interest rates since 2008. That the forint can now take a 5% knock and there is no talk of default shows the useful work that the Government has done converting Hungary’s international debts to domestic ones.


    • Angela Bogaczy

       /  20/02/2014

      Hear! hear!


    • Yes, you are right that converting Hungary’s international debts to domestic ones is vital indeed. I wrote a short post about this issue earlier:

      As far as the exchange rate is concerned, I think 320-340 HUF/EUR would be realistic and justified from a macroeconomic point of view in fact… and it would be good for the Hungarian economy. The big problem is really still the inherited ticking FX loan bomb which hasn’t been defused completely. (Though it’s much, much less dangerous now than it was in 2010.)



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