Hungary c.bank Deputy Governor says inflation has not peaked yet

MNB not in an easy position

The situation has not become easier and the outlook has not become clearer,

, Virág kicked off his assessment. He said the MPC was unanimous on the decision to raise interest rates again and remains ready to react decisively.

Mounting risks

Re-pricings at the beginning of the year were stronger than in previous years, and commodity prices are also rising. Since the last interest rate decision

THE risks HAVE CLEARLY become more pronounced.

8.5% inflation?

The retreat of inflation is taking longer, and the rate is expected to rise further in February,

it could exceed 8% or even approach 8.5%

, said Virág.

This announcement is clearly a surprise, as the market had previously expected inflation to start falling in February from 7.9% in January due to the price freezes. It remains to be seen what the MNB sees in the background that could justify a further rise.

The structure of inflation has also changed

There have also been significant changes also in the structure of inflation. The price index for market services has been generally higher than that for industrial goods, which has changed in recent months due to commodity prices, food prices and disruptions in supply chains, said Virág. In addition, the coronavirus pandemic has also affected the structure of consumption, with an increasing share of our income being spent on manufactured articles.

Strong re-pricing also in February

We should expect high re-pricing in February, which could mean that inflation could accelerate further, to over 8%, Virág reiterated.

Inflation will not peak even in February?

In terms of a further rise in inflation, the Deputy Governor of the MNB is talking not just about February, but "the months ahead". He said the key now is to dampen the third stage of inflation and avoid second-round effects.

Economic growth

The Monetary Council expects Hungary to continue to enjoy buoyant growth in 2022 after 2021, said Virág.

The Fed will act soon

Alongside inflation, the upcoming interest rate hikes by the central banks of developed economies should be increasingly on the decision map, said Virág. The US Federal Reserve could be the first to take action in March, but they are already pricing in one or two rate hikes by the ECB as well this year.

Tightening is to go on for longer

With its decision in January, the MPC set a clear path by stepping up interest rate hikes and gradually bringing the base rate up to the benchmark rate. The key now is to pursue this path with determination, said Virág in response to a question.

We must be prepared to maintain this tighter stance over a longer period,

he added.

Conflicting effects induced by the government

These impacts are difficult to measure in real time. On the one hand, an increase in disposable income can lead to greater consumption, so that re-pricing can put businesses in a more favourable environment. On the other hand, government price freezes also have a significant impact on inflation. These measures affect inflation at a time when cost-side pressures are strongest, which is why Hungarian inflation has been able to stay lower in the region, said Virág.

The central bank is preparing for a long journey

The March Inflation Report will be an important milestone in the rate hike process, providing an opportunity to reassess risks. For monetary policy, it is important to continue to take predictable and decisive action.

The fight against inflation will be a long journey, the end of which remains to be seen,

stressed Virág.

MNB hikes rates 50 bps

The Monetary Council raised the central bank's base rate by 50 basis points to 3.4% at its monthly policy meeting on Tuesday. The two ends of the interest rate corridor are shifted upwards also by 50bps to 3.4% (overnight deposit rate) and 5.4% (O/N lending rate).

More to follow!