The Monetary Council of Hungary’s National Bank (MNB) raised the base rate by 50bp to 2.9% at its first monthly policy meeting of the year on January 25, above the 30bp consensus.
The central bank disappointed markets in December with a 30bp hike in December even as core inflation spiked to a 20-year-high.
Policymakers also widened the interest rate corridor by 50bp to 2.9% and 4.9%. The decision suggests that the MNB will continue to raise the one-week deposit rate from 4% at present.
The one-week depo rate, which moved in tandem with the base rate from June until November, has become the main policy tool. It diverged from the base rate to allow the central bank to respond to short-term risks in financial and commodity markets "quickly and flexibly".
In a statement released after the meeting, the Council said mitigating second-round inflation risks justified the continuation of the tightening cycle at a faster pace.
Persistently high commodity, crop, food and energy prices and elevated international freight costs continue to point to sustained external inflationary pressures, they added.
Persistent inflationary pressures justified the rate hike, MNB deputy governor Barnabas Virag said after the meeting. Headline inflation is "close to plateauing", but core inflation could reach 7%, he added.
He said the base rate and the one-week deposit rate could converge in the course of the first half.
Analysts expect inflation to gradually moderate due to the high base, but upside risks remain due to the wage outflows, VAT refund and pension bonus, scheduled before the election. High commodity prices could also have a significant second-round effect on consumer prices.
Morgan Stanley analysts expect inflation in Hungary to start slowing down in April, and the slowdown will be even more pronounced in May. As a result, they expect the MNB to slow the pace of interest rate hikes to 30bp in Q2.
K&H Bank says the MNB will maintain the 50bp hikes at the next two meetings, lifting the base rate to 4%. The monetary tightening cycle could end at 4.5-5%
Hungarian Takarekbank expects the base rate to hit 4% by spring, while the one-week deposit rate could rise to 4.75-5% in the same period.