BUDAPEST: Hungary's central bank may cut its economic growth outlook sharply next month, and any easing it adopts in response would probably use non-conventional policy tools, a rate-setter told Reuters on Thursday.
The bank has this year cut interest rates to a record low 1.35 percent and already launched unconventional easing to counter a slowing economy. In September's inflation report it forecast growth would slow to 2.5 percent in 2016 from 3.2 percent expected this year.
But after third-quarter growth came in at just 2.3 percent, missing the market's and the central bank's expectations, the full-year forecast looks optimistic. "There is a strong chance that our December inflation forecast will project a much lower growth outlook," policymaker Gyula Pleschinger told Reuters in an interview.
Analysts in a Reuters poll conducted days before the third-quarter growth figures were published projected economic growth slowing to 2.4 percent next year from about 2.9 percent this year.
"In theory, it is possible that the output gap (between actual and potential economic growth) will close later than at the end of 2017," as was expected in the September inflation report, Pleschinger said, adding that a clearer picture would emerge in coming weeks. The central bank will hold its last policy meeting of the year on Dec. 15.
Its Managing Director Barnabas Virag told Reuters on Wednesday that the bank could "fine-tune" its monetary easing toolkit next month to counter downward risks to inflation and growth.
"If it is indeed the case that there is room for further easing, then there is a good chance that we will look at our targeted non-conventional tools," Pleschinger said.
He said modifying a programme to channel commercial banks' funds into government debt from central bank deposit facilities was one such option, but the Monetary Council had not yet discussed that possibility. In common with most of his colleagues, Pleschinger has supported the bulk of the central bank's rate cuts since he was appointed in March 2013. The bank has cut rates by 365 basis points since then and by 565 basis points over the past four years.
Analysts at the Royal Bank of Scotland said in a note that some of the remarks made by Virag indicated that the central bank was "implicitly aiming at weakening the currency in order to support GDP growth."
Pleschinger said the central bank had no exchange rate target or specific intent to weaken the forint, and that any impact from currency swings on inflation was marginal, through prices of imported goods.
"With regard to imported inflation, a weaker currency can be beneficial. However exchange rate movements are no longer so significant," Pleschinger said. "We have tools, be it interest rates, or targeted monetary policy tools, that are a lot more effective in ensuring we meet our inflation target."
The Reuters poll projected annual inflation picking up to 2.8 percent by the end of 2017 from around zero now.
Pleschinger said there was no pressure to incentivise lending by cutting the overnight deposit rate, currently at 0.1 percent, into negative territory, which would mean commercial banks having to pay to park funds at the central bank.
"We aim to get the debt yield curve flatter and to bring down longer yields, which can have a bigger impact on the lending channel so that market lending becomes a bit easier," he said.
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