bne IntelliNews – Hungarian central bank raises policy rate to 14-year high

The Monetary Board of the National Bank of Hungary (MNB) raised the rate by 100 basis points to 10.75% on July 26, above the consensus of 50 basis points. This follows a 200 basis point hike two weeks ago at the no rate setting meeting. The base rate is now at its highest level since December 2008.

Among its CEE peers, Hungary has the highest base rate and the lowest negative interest rates. The hawkish forecast could help keep the EUR/HUF exchange rate below 400, after it hit record highs against the Swiss franc, dollar and euro earlier this month.

The overnight deposit rate will rise to 10.25% and the overnight lending rate to 13.25%, both up 100 basis points respectively.

Upside risks to inflation have increased further since the June interest rate decision, while the risk of second-round inflationary effects has increased, the MNB said in a statement.

Headline inflation hit 11.7% in June and core inflation edged up to 13.8% up 100bps and 160bps respectively, the highest level in a quarter century. Policymakers stressed that the MNB will continue with interest rate hikes until inflation stabilizes sustainably around the central bank’s 3% target and inflation risks balance out at monetary policy horizon.

The central bank is ready to step in and use all the instruments in its monetary policy toolkit, they added. The MNB statement also touched on the macroeconomic outlook. GDP growth will slow to 2-3% in 2023 from 4.5-5.5% this year.

A combination of central bank measures and fiscal measures on the government’s spending side have together mitigated financial market risks, the statement said. In addition to freezing public investment and removing windfall taxes, the government took decisive fiscal tightening measures that helped stabilize the forint.

One of these measures includes the reduction of retail energy subsidies from August 1, one of the cornerstones of government policies. Economists said the fiscal adjustment was needed to meet the 4.9% deficit target.

Improving fiscal and current account balances are bolstering the effectiveness of monetary policy, Deputy Governor Barnabas Virag told a news conference, referring to the government’s recent fiscal tightening measures. The current account and trade balance deficit will be temporary and should improve with the build-up of new export capacity.

Partial removal of energy subsidies, however, could push headline inflation up 3 percentage points, he added. Inflation could peak at 13-14% this year, driven mainly by rising food and industrial product prices, while service price increases will be lower.

Virag estimated Q2 GDP growth hit 6%, but pointed to a “clear slowdown” from June while noting growing risks of recession in the global economy.

Policymakers will revise GDP and inflation estimates in quarterly report to be released in September

The Deputy Governor of the MNB also referred to the MNB’s foreign exchange swap tenders providing liquidity in euros launched daily from July 8th. The MNB described the tenders, aimed at improving the transmission of monetary policy, as effective.

The rate decision was roughly in line with market prices, with one-month forward rates at 12.05%, three-months at 12.75% and six-months at 12.8%, the analysts said. Magyar Bankholding analysts. The bank sees the base rate peaking at 11.75% in the fall and monetary easing could start from H2 2023 at the earliest.

K&H Bank predicts that the interest rate cycle could end in December at around 13%, which is above market consensus.

London-based Capital Economics says the MNB is likely to remain under pressure to continue its tightening cycle and rates could climb to 13% by the end of the year.