The Hungarian National Bank (MNB) raised the base rate by 30 bps to 2.1% at a policy meeting on November 16, stepping up the pace of the tightening cycle from a 15 bps hike in the previous two meetings. The decision was in line with the consensus, although some Hungarian analysts had forecasted a more aggressive move. Policymakers noted that they were ready to raise the one-week deposit rate above the base rate to influence interest rates on the short-end.
The forint was trading just 1% above its weakest level ahead of the meeting on concerns that the MNB was not acting aggressively to tackle inflation, which hit a nine-year high last month at 6.5%, above its target.
There was pressure on the Hungarian policymakers after central banks in Poland and the Czech Republic have increased the base rate by 75 bps and 125 bps respectively at their last meetings.
The overnight deposit rate was raised by 30 bps to 1.15%, and the overnight and one-week collateralised loan rates by the same clip to 3.05%.
The persistent rise in external inflationary pressures and increasing second-round inflation risks have necessitated more extensive and longer-lasting monetary policy tightening, according to the statement after the meeting.
The Monetary Council will continue the cycle of interest rate hikes "until the outlook for inflation stabilises around the central bank target sustainably and inflation risks become evenly balanced on the horizon of monetary policy", the rate-setters said, reiterating their earlier policy stand.
The MNB expects headline inflation to rise above 7% in November and decline only slowly from the end of 2021, adding inflation next year is expected to be substantially higher than the September forecast.
Inflation looks set to rise further in the coming months and the combination of strong wage growth and pro-inflationary fiscal policy ahead of elections next year will keep it above the central bank’s upper 4% target level until the end of 2022, Capital Economics commented after the rate decision.
The MNB ‘s tightening cycle could result in interest rates rising to 3-3.5% by the end of the first quarter of next year, according to K&H.
The surge in commodity prices and the pick-up in wage growth dynamics due to the tight labour market could have a significant second-round effect, Takerekbank said.
External factors accounted for 60% and internal factors for 40% of inflation, with both showing upside risks, MNB deputy governor Barnabas Virag said in a press briefing. The price cap on fuel has no impact on monetary policy, he added. The government set a HUF480 (€1.3) per litre ceiling on 95-octane fuel and diesel last week for three months.
The MNB must respond to a recent increase in short-term risks in financial and commodity markets "quickly and flexibly" and it "must be ready to set the interest rate on the one-week deposit above the base rate", according to the statement.
The rate for the one-week deposit facility has moved in tandem with the base rate since late June. The council said the rate for the facility will continue to be set at weekly tenders on Thursdays.
"We intend to manage the anchoring of inflation expectations along a predictable, long path of base rate hikes. In addition, the flexibility of the one-week deposit rate allows us to influence interest rates on the short-end to respond to rapid market movements," Virag said after the meeting.
The EUR/HUF rate moved hectically during the day. It began to appreciate from 366 to 363 after comments by Governor Gyorgy Matolcsy’s deputy.
The MNB will phase out the use of a swap facility in order to tighten liquidity in the banking system. The swap facility was introduced earlier to pump liquidity into the banking sector. The stock of FX swaps fell to HUF764bn (€2.1bn) on Wednesday.
In a separate statement, the MNB said its Financial Stability Board decided to cut the minimum level for the foreign exchange coverage ratio, which limits on-balance sheet open FX positions as a percentage of the total balance sheet, to -15% from -30% in the case of an FX liability surplus and to leave it unchanged in the case of an FX asset surplus.