Economy 28 June 2022, 4:46pm

Hungary central banker says dual interest rate regime coming to an end

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The National Bank of Hungary (MNB) has on Tuesday raised its base rate in a surprise move by 185 basis points, well over expectations. Deputy Governor Barnabás Virág, in charge of monetary policy, has revealed at an online briefing with analysts that "decisive" rate hikes would follow and today's decision fits into that strategy. He also said the bank was bringing the base rate and the 1-week deposit rate (benchmark) to the same level, but this convergence would not be complete, as the bank will continue to decide on the 1w depo rate every week and it will raise it if necessary. In that case, the Monetary Council will consider how much the 1w depo rate was raised when deciding on how much it would hike the base rate at its next meeting.

Read our reports on today's rate decision and the central bank's updated inflation and growth estimates at the links below:

Highlights of MNB Deputy Governor Barnabás Virág's statements during his briefing:

According to the Monetary Council, there's one thing worse than inflation, and that is prolonged high inflation. Consequently, the bank's decisions are aimed "110%" on fighting inflation, but there's no easy victory in this battle.

We will do everything to reduce inflation.

A "persistent, determined monetary tightening cycle is coming". The central bank started raising interest rates a year ago, and the MNB is leading the way in tightening in Europe.

The anchor of inflation expectations must be broken, and for this it is very important that inflation peaks.

Preventing second-round effects and anchoring inflation expectations are crucial in terms of achieving the inflation target.

The central bank's move to bring the 1-week deposit rate and base rate to the same level has become necessary.

On Thursday, the 1-week deposit rate will be raised by 50 basis points, but

THE CENTRAL BANK IS STILL PREPARED TO REMAIN FLEXIBLE ON THE ONE-WEEK DEPOSIT RATE.

In other words, the MNB cannot rule out that the one-week deposit rate will change in the coming weeks, but the merging of the 1w depo and the base rate will be a permanent feature of monetary policy.

The decision to bring the two rates to the same level was driven by high inflation, inflation expectations being stuck high, increased market volatility (HUF).

It is important for every channel to support the fight against inflation, said Virág, referring to the forint exchange rate. (EUR/HUF hit a new all-time low yesterday at 404.)

The central bank can now hold foreign exchange liquidity swap tenders not only at the end of quarters, but also during quarters.

In the second half of the year, the economy will still be buoyant, but we will face a slowdown. Inflation is expected to peak in the autumn, but this will also be heavily influenced by the development of price freezes. Inflation could reach the 3% mark for price stability from 2024, but inflation expectations remain high.

One of the main goals is to lower inflation expectations.

The MNB will continue to decide on interest rate hikes on a monthly basis, but the 1-week deposit allows for a quick and flexible reaction. If there is an unscheduled 1-week deposit rate hike, it will be included in the next monthly base rate hike.

Rate hikes will continue until there is a turnaround in inflation.

The MNB expects inflation to remain above its target even in 2023.

Virág said it was important to restore the balance of the budget and the current account, with significant progress in the former already seen in the summer.

It is also important to reach an agreement on EU funds, and all the signs point to this will be happening.