Economy 22 June 2021, 3:05pm

Hungary central bank starts tightening cycle with monthly frequency

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In order to ensure price stability, to prevent the lasting effects of inflation risks and to anchor inflation expectations, it is warranted to launch a cycle of interest rate hikes, and raise the interest rate of the 1-week deposit facility to 0.9%, the same level as the base rate, the Monetary Council said in a statement on Tuesday after raising the base rate to 0.9% from 0.6%. The effective tightening is 15 basis points, as the 1-week depo has been used as the benchmark policy tool.

The Monetary Council's statement usually contains an assessment by the rate-setting body, the rationale behind the rate decision and (obscure) hints at what further monetary policy steps could be expected.

This time around, however, the market was expecting the MPC to be specific about certain crucial issues. Among other things it wanted to see what the central bank wants to do with the interest rate on the 1-week deposit facility, which is currently the benchmark policy tool (about which the MNB's Board of Directors should decide on Thursday - in theory), and what will happen to the Funding for Growth Scheme (FGS).

As for the former, it will happen as expected, i.e. the 1-w depo rate will be aligned with the now raised base rate and upped by 15 bps to 0.9%.

It has also been suggested that the MPC might make a decision on rates every three months, which policy meetings would be aligned with the release of the MNB's quarterly Report on Inflation that would include the updated GDP and CPI estimates. It turns out that rate hikes could be carried out every month if necessary.

The MPC's statement says:

In the context of the outlook for inflation and developments in risks, the Monetary Council assesses the need to further tighten monetary conditions in a data-driven manner at its monthly policy meetings.

Naturally, this does not mean that the Council will raise rates every month, but given that the MPC clearly stated this is the first step of a tightening cycle, it's hard to imagine that there will be no rate hikes for at least a while. The market apparently shares this view, because the forint started to ease after the announcement of a 30bp raise to the base rate but it responded to the release of the MPC statement by strengthening.

The bank noted that in parallel with the tightening of interest rate conditions, the Monetary Council has started to transform the use of instruments having an effect at longer maturities. The pick-up in economic recovery has made it possible for the Bank to phase out certain crisis management tools.

Accordingly, with the exhaustion of the HUF 3,000 billion available, the Bank has closed the FGS Go!.

However, the MNB intends to introduce instruments supporting environmental sustainability. The Monetary Council will provide information on those instruments in the coming months.

The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy.

The Monetary Council also said it would

continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy.

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