Hungary c.bank will hold rates high until risk perception improves markedly - Virág
We have already said that the current rate hike cycle will be a marathon, where everyone can run 25-30 kilometres with a relatively strong stamina, with the last third being the hardest, where mental fitness is also important.
The world is now entering this phase where pain must be faced, but we have to take this on to sustain growth,
said Barnabas Virág in his presentation.
It is wrong to talk about a choice between inflation and economic growth, he added, likely referring to a remark by László Parragh, President of the Hungarian Chamber of Commerce and Industry (MKIK), who told the same conference earlier today:
Economic policy must decide whether it is pro-growth or anti-inflationary. The two cannot go together, even if neither is a good choice.
High inflation in itself damages the foundations of growth, and if it persists, the foundations of growth could be permanently damaged. We are now in a situation where we have high inflation and a significant current account deficit due to the energy price shock. Economic policy has to respond to this, said Virág.
According to the MNB Deputy Governor, inflation is "rampant" around the world, but Europe is the most exposed. At the same time, there are increasing signs that an inflation turnaround is imminent, with five factors pointing in that direction:
- Energy prices in Europe have fallen significantly.
- International freight costs are decreasing.
- Frictions in global value chains are reduced.
- Retail sales in Hungary have been declining since March, indicating an adjustment in demand.
- Expectations for retail sales prices have also moderated.
These effects may become so dominant that they get reflected also in the consumer price index in the first half of next year. Inflation may continue to rise in the coming months, albeit at a declining pace, mainly driven by energy prices.
According to Virág, the Hungarian economy has the capacity to adjust quickly, so the country's current account deficit
COULD FALL EVEN FASTER THAN THE MARKET EXPECTS.
The Deputy Governor said that in the current extraordinary times, special measures are needed to preserve our capacity to grow so that when conditions recover, growth can bounce back quickly. Among the problems facing emerging markets, Virág highlighted the strong US dollar, saying that we are getting closer to a new "plaza moment", when the world will act in a coordinated way to counter this, but of course we need the Fed first and foremost.
The MNB has recently raised interest rates significantly, and
current interest rate levels are now likely to represent a positive forward-looking real interest rate.
Following the rate hikes, the central bank has started to tighten liquidity in the second phase, and Barnabás Virág says this is going well. Tightening short-term liquidity means that more and more of this liquidity has to be sterilised with longer-term assets. Currently, about 40% of total liquidity is short-term and the trend could continue.
Last week we saw an environment that was already threatening financial and price stability, hence the need for the strong action announced last Friday. One such move is that the MNB would take the currency swaps related to the payment of energy bills out of the market, while also forcing the closure of positions against the forint.
Negotiations with importers have taken place this week, and
from tomorrow, the transfer of the foreign currency needed to settle the energy bill will begin,
said Virág. He added that the MNB also keeps in mind the reserve adequacy requirements, and the foreign exchange reserve is managed accordingly. No agreement has been reached with the EU yet, but funds are coming in from Brussels, which will help the system to continue operating in the coming months.
The MNB will continue to accept all bids under the one-day deposit facility, and the daily FX swap facility has a generous EUR 5 billion limit, the Deputy Governor stressed.
The Hungarian central bank will continue to use the new instruments until risk perception improves significantly,
he concluded.
Cover photo: Portfolio
