Economy 7 July 2022, 9:18am

Hungary central bank carries out huge rate hike to stem HUF weakening

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The National Bank of Hungary (MNB) has announced its one-week deposit tender at an interest rate of 9.75% on Thursday, 200 basis points higher than a week ago. The move itself is not a surprise, as Deputy Governor Barnabás Virág announced yesterday that the bank would respond to the extreme forint weakness by raising its benchmark rate, but the degree of the hike is kind of a shocker.

The central bank was in a difficult position ahead of today's one-week deposit tender, as just last week the base rate and the one-week deposit rate were lined up, seemingly ending the much-criticised duality of interest rate policy. However, they indicated after the move that they remain ready to remain flexible with the one-week rate if necessary.

In recent days, the forint has weakened sharply against the euro, rising from around 400 on Tuesday morning to above 416 on Wednesday afternoon. It was therefore increasingly likely that the central bank would have to "do something". On Wednesday evening, Barnabás Virág had already indicated in a statement that a decisive interest rate hike would end the weakening of the forint, and the Deputy Governor's remarks have immediately propped up the Hungarian currency.

EUR/HUF

So, the only question was how much the MNB will raise the one-week deposit rate, and the MNB decided to hike by 200 bps to 9.75%.

The next Monetary Council meeting is scheduled for 26 July. The bank had indicated that the base rate would track the one-week deposit rate, meaning that the two will be brought to the same level again. The question is whether, in the meantime, further steps like today's will be necessary, i.e. how much the base rate will have to be raised at least.

In the coming weeks, much will depend on whether the current rate hike will curb HUF weakening and whether the market will find the move convincing enough. If the Hungarian currency starts to ease again, the central bank may well have to intervene before the end of the month.

In recent days, expectations for the peak of the interest rate path have also continued to rise on the market, as investors have started to price in the possibility that the MNB will be forced to tighten due to the weak forint. Forward Rate Agreements (FRAs) are already close to 12%, meaning that investors believe there could be another 300 basis points hike before the MNB puts an end to its tightening cycle.

With the current move, Hungary still has the highest policy rate in the region, although the Polish central bank is expected to make another 75 basis points move this afternoon, but even that will not put Hungary's first place in the region at risk.