Economy 26 September 2023, 2:00pm

Hungary central bank takes us back where we were a year ago

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In line with expectations, the Monetary Council of Hungary's central bank (MNB) has left the base rate on hold at 13.00% at its monthly policy meeting on Tuesday, while the benchmark rate is expected to be lowered by another 100 basis points to 13.00%. The bank promised the simplification of its toolkit for today, which means the upcoming MPC statement and a briefing starting at 3pm should deliver further excitement.

A gyenge forinttal teszteli a piac az MNB hitelességét

The Monetary Council has left the base rate unchanged at 13.00% today, in line with the market's call. The central bank's intention about the one-day deposit (i.e. benchmark) rate will be unveiled only in the MPC's official statement at 3pm, but we should expect another 100bp cut to 13.00%.

This is hinted at by the fact that the central bank has adjusted the two ends of the interest rate corridor, with the upper end, the overnight lending rate, now set at 14% and the O/N deposit rate at 12%. The former implies a reduction of 250 basis points and the latter a cut of 50 basis points compared to the previous rate. Last week, the central bank had already hinted that it could make the interest rate path symmetric around the base rate.

At 3pm, the usual statement of the central bank will be published with the rationale. It is likely to be the only one that will specifically mention a further 100 basis point cut in the benchmark rate, but after the above change in the interest rate corridor, this is practically a sure bet.

In addition, a possible simplification of the monetary policy toolkit may be announced in the statement. The main question here will be what will happen to the existing benchmark instrument, the one-day deposit, and how the base rate will be made the benchmark again.

In a bid to put a stop to a seemingly unstoppable forint selloff, the MNB raised the benchmark interest rate by 500 basis points to 18% in mid-October last year, after ending the hike of the base rate a year ago, in September 2022. The central bank began trimming this 18% benchmark rate in May, which is how the two interest rates can now be aligned. So with the 13% benchmark rate, we are back to where we were a year ago, only the economy in the meantime has suffered the consequences of an extremely high interest rate environment.

At the same time, the MNB will publish its latest GDP and inflation forecasts, which were also discussed today by the Monetary Council in the context of the Inflation Report. And if that wasn't enough excitement, also from 3pm, MNB Deputy Governor Barnabás Virág will give a background briefing on the the rationale for today's decision(s).