Economy 12 July 2022, 2:07pm

Hungary MNB publishes rationale for extraordinary rate hike

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"The situation in financial markets has recently increased the risk of persistent inflationary effects, posing a clear threat to price stability," the Monetary Council of Hungary's central bank (MNB) said in a statement on Tuesday, after raising the base rate by 200 basis points to match it with the one-week deposit rate, which was hiked 200bp last Thursday. The interest rate corridor has also been taken 200 basis points higher to give the bank wiggle room for further monetary tightening in case it becomes necessary.

The primary objective of the National Bank of Hungary (MNB) is to achieve and maintain price stability. Upside risks to inflation have strengthened further since the June interest rate decision, while the risk of second-round inflationary effects has increased, the bank said in a statement today.

The situation in financial markets has recently increased the risk of persistent inflationary effects, posing a clear threat to price stability.

The effects of unfavourable financial market developments and persistently high commodity and energy prices point to a prolonged period of high external inflation.

Furthermore,

high inflation may persist if strong price dynamics feed into economic agents’ expectations, making it more difficult to ensure price stability.

To manage risks, the MNB raised the one-week deposit rate by 200 basis points on 7 July 2022.

Consistent with its strategy formulated in June, the Monetary Council considers it necessary that the rise in the one-week deposit rate should be incorporated into the base-rate tightening cycle as soon as possible. Due to the increased challenges, in order to anchor inflation expectations and mitigate second-round inflation risks, it is warranted to raise the base rate to the level of the one-week deposit interest rate.

The MNB continues to stand ready to respond quickly and flexibly by setting the interest rate on the one-week deposit instrument if warranted by the rise in short-term risks in financial and commodity markets.

According to today’s decision of the Monetary Council, the central bank base rate was raised by 200 basis points to 9.75 percent. The overnight deposit rate was increased by 200 basis points to 9.25 percent, and the overnight and the one-week collateralised lending rates were increased by 200 basis points to 12.25 percent.

The Bank considers it crucial that short-term rates in every sub-market, particularly in the swap market, and at all times develop consistently with the level of short-term rates deemed optimal by the Monetary Council. To that end, on 8 July 2022, the MNB started the use of swap tenders providing foreign currency liquidity within quarters with an overnight maturity. By maintaining an active presence in the market, the MNB enhances the effectiveness of monetary policy transmission, thereby supporting the achievement and maintenance of price stability.

The MNB started the cycle of interest rate hikes one year ago, first among the central banks in the European Union. The further rise in inflation and persistent inflation risks warrant the decisive continuation of the tightening cycle. The MNB continuously monitors developments in financial market risks as well and stands ready to intervene in a decisive manner using every instrument in its monetary policy toolkit, if necessary. Maintaining tighter monetary conditions for a longer period is warranted to manage increasing second-round inflation risks resulting from persistently negative supply effects.

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