Hungary’s Monetary Council decides to slow the pace of tightening cycle

Hungary’s Monetary Council decides to slow the pace of tightening cycle
The central bank also raised the O/N rate and continued to cut back government bond purchases. / Yelkrokoyade
By bne IntelliNews September 22, 2021

Hungary’s central bankers slowed the pace of tightening at the September 21 meeting, in addition to raising the O/N rates and continuing to cut back government bond purchases

Rate-setters raised the central bank’s base rate by 15 basis points to 1.65% at a scheduled meeting on September 21,  below the 20-30bp hike expected by analysts.

The MNB began a monetary tightening cycle in June to tame the spike in inflation, which came in well above its 4% tolerance band this year.

The central bank raised the base rate by 30bp at the last three policy meetings from a record low of 0.9% to 1.5%.

At the August meeting, the MNB dropped its commitment to hike rates on a monthly basis and said it will conduct a "comprehensive assessment of the results achieved by the cycle of interest rate hikes" at this month’s meeting based on the latest quarterly inflation report.

Preliminary figures from the report show that the MNB raised its forecast for average annual inflation from 4.1% to 4.6-4.7% in 2021 and from 3.1% to 3.4-3.8% in 2022. Hungary's economy is set to expand 5-6% in 2022, following a 6.5-7% increase in 2021. The forecasts are in line with analysts’ projections.

Rate-setters also raised the O/N deposit rate by 15bp to 0.70% and the O/N and one-week collateralised loan rates by 15bp to 2.6%.

In a statement released after the meeting, policymakers said the MNB will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target. Upside risks warrant a continuation of the monthly interest rate tightening cycle, but in smaller steps, they added.

Policymakers decided to lower the weekly target amount for purchases of government securities in the MNB's quantitative easing programme from HUF50bn (€141mn) to HUF40bn from the week starting September 27. The council had reduced the weekly QE target from HUF60bn last month.

The FX swap facility providing forint liquidity would be gradually phased out, according to the statement.

Commenting on the latest quarterly inflation report, the council said inflation was expected to rise further in the autumn months and to stay above 5% during the remainder of the year due to the pass-through of increased commodity prices and freight costs into industrial goods prices.

Inflation could exceed June’s peak at 5.5-6% in November, Deputy Governor Barnabas Virag said.

Core inflation is expected to rise close to 4% during the rest of the year. Policymakers said the effects of the bank’s tightening cycles "will be clearly felt" and inflation could stabilise around the 3% central bank target in 2H22. Earlier, the MNB said this could be expected in Q2.

Analysts expect the MNB to continue monetary tightening and raise rates by 15bp in the coming months, bringing the base rate to 2.1% at the end of the year.

The forint traded slightly lower against the euro after the meeting at HUF353.