MNB 1st in EU to Start Tightening Cycle


As expected, the Monetary Council of the National Bank of Hungary (MNB) raised its base rate to 0.9% for the first time in a decade at its latest rate-setting meeting, with the 30-basis-points increase slightly exceeding market expectations.

With the move, Hungary became the first country in the European Union to start a cycle of rate hikes to deal with the mounting price pressure in the pandemic’s wake. The central bank also decided to phase out its program to provide cheap corporate loans but confirmed that it would keep its government bond purchases in place. It will also launch instruments supporting environmental sustainability, it said.

The move slightly exceeded expectations as the market was expecting a 25-basis-point increase. The MNB said it would review the need for more hikes on a monthly basis to tackle price pressures amid a faster-than-expected recovery from the pandemic.

“The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilizes around the central bank target, and inflation risks become evenly balanced on the horizon of monetary policy,” the MNB said in its statement.

The council left its overnight deposit rate steady at -0.05%, as expected. However, it said it would bring the interest rate on its crisis management instrument, the one-week deposit rate, into line with the base rate.

According to analysts, the MNB had no other choice but to act as inflation has kept running above its 2-4% mid-term target, reaching 5.1% in May), and the pressures from the reopening economy kept mounting.

The bank now projects average inflation at 4.1% this year, returning to its 3% policy anchor sometime around mid-2022.

Properly Anchored

“In the Monetary Council’s assessment, it is of key importance to ensure that inflation expectations are properly anchored. Upside risks to the outlook for inflation have generally increased,” the bank said, adding that “sustained rises in commodity prices and international freight costs point to a higher external inflation environment.”

Reacting to the news, economist Liam Peach of Capital Economics noted, “With the recovery set to strengthen and inflation likely to increase further in the coming quarters, we expect additional interest rate hikes in the second half of this year.”

Peach emphasized that the MNB also raised its GDP forecast for 2021 from 5% to 6.2%, while the prognosis for 2022 and 2023 was left unchanged, at 5.5% and 3.5%, respectively.

According to Peach, his firm is even more optimistic than the MNB, as Capital Economics expects the Hungarian economy to expand by 6.8% this year, 5.5% in 2022, and 4.5% in 2023.

Capital Economics now forecasts that the MNB will announce 20 basis points rate hikes in September, December, and next March, meaning the current cycle would last until the base rate reaches 1.5%.

Faster Pace

However, the global financial group Morgan Stanley calculates with a faster pace, saying that the MNB might raise the base rate again in July, August, and September, increasing the rate by 15 basis points each time, thus reaching a 1.35% base rate this year.

According to Morgan Stanley analysts, the acceleration of the Hungarian consumer price index CPI will lose its momentum in 2022, so they think the MNB will not modify the base rate after September.

Gergely Suppan of Takarékbank expects further rate hikes in September, December, and next March; however, he thinks that as inflation is likely to decrease from mid-2022, the tightening cycle will end then. Therefore, he expects the base rate to be at 1.25% at the end of this year and 1.5% from next March.

Dávid Németh, head analyst at K&H Bank, thinks that the next rate hike might happen as soon as July, followed by 15-basis-points steps afterward.

Analysts at OTP Bank said a rate hike cycle has started, which will last until monetary conditions ensure that inflation can safely return to target and upward inflation risks are mitigated.

“The cycle is based on monthly rate-setting decisions, as opposed to the previous communication on quarterly steps,” the analysts emphasized According to OTP Bank analysts, they expect the size of these hikes to be decided upon a data-driven approach, which could be 10 or 15 basis points.

Numbers to Watch in the Coming Weeks

On July 6, the Central Statistical Office (KSH) will publish May retail trade data. The next day, the first estimate of the May performance of the Hungarian industry will come out, and important figures from the troubled tourism sector will also be released. Finally, June consumer prices will be published on July 8.

This article was first published in the Budapest Business Journal print issue of July 2, 2021.

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