MNB Raises Base Rate by 100 bp to 11.75%

MNB

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The Monetary Council of the National Bank of Hungary (MNB) raised the central bank base rate by 100 bp to 11.75% at a monthly policy meeting on Tuesday, according to a report by state news wire MTI.

The council had previously raised the base rate by 100 bp to 10.75% at the end of July. It also decided on Tuesday to raise the O/N deposit rate by 100 bp to 11.25% and the O/N and one-week collateralized loan rates by 100 bp to 14.25%.

The O/N deposit rate and the collateralized loan rate mark the bottom and the top, respectively, of the central bank's "interest rate corridor". The base rate is paid on mandatory reserves.

"The further rise in inflation and persistent inflation risks warrant the decisive continuation of the tightening cycle," the council reiterated in a statement released after the meeting.

"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," the policymakers said.

"Maintaining tighter monetary conditions for a longer period is warranted to manage increasing second-round inflation risks resulting from persistently negative supply effects," they added.

The council reiterated that the tightening cycle will continue "until the outlook for inflation stabilizes around the central bank target in a sustainable manner and inflation risks become evenly balanced on the horizon of monetary policy".

MNB Takes Measures to Reduce Excess Liquidity

"To enhance monetary transmission further, the Monetary Council decided to introduce three measures which will support the development of short-term financial market interest rates consistently with the Bank’s policy stance in a turbulent period in financial markets by draining interbank liquidity from this autumn. The bank will raise the required reserve ratio set for the banking system. Additionally, central bank discount bill auctions will be announced and held regularly. The bank will also introduce a long-term deposit instrument in order to sterilize liquidity in the banking system at longer maturities than currently", the policymakers said.

At a press conference after the meeting, MNB deputy governor Barnabás Virág said the resolute continuation of interest rate hikes and the tightening of liquidity were the prominent messages of today's decision.

He noted that the bank had pumped around HUF 11 trillion of extra liquidity into the economy in 2020 and 2021 to help the economy, but with interest rates rising this liquidity needs to be managed.

Virág said MNB estimates that its three new measures will tie up around half of the current liquidity and is hoping it ties up a little bit more. Market liquidity is around HUF 9.5 tln-9.7 tln at the moment in the form of one-week deposits, he added.

MNB will be raising banks' mandatory reserves from the current 1% to 5%, checked on a daily basis, and on top of that there will be an optional reserve rate.

Central bank discount bill auctions have already been used quarterly but this system will be expanded, Virág said. The auctions will start "soon" but he asked for time while MNB conducts talks in the coming days with market actors to hammer out details.

Virág said the interest rate on all three MNB instruments will be tied to the central bank base rate.

Inflation Could Reach 15-16% in August

Answering questions regarding inflation Virág said consumer prices could rise by around 15-16% in August. He noted that repricing had been high in July and this practice continued in August.

Inflation will continue to rise in the coming months, and there are significant factors influencing inflation that are outside the scope of monetary policy, he noted.

Important factors are changing on a weekly basis and it would be possible to forecast CPI for autumn and winter only with great uncertainty. MNB's Inflation Report in September will provide a clearer picture, he added.

Virág said that although inflation is high, it looks premature to talk about stagflation, looking for example at low unemployment rates, but changes to energy prices could be key.

Regarding the end of MNB's interest rate hike cycle, the key will be the evaluation of inflation prospects and second-round effects, as well as seeing how Hungary's negotiations on an agreement with the European Commission on funding matters develop. These two things would be necessary above all else in order to be able to talk about closing the tightening cycle.

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