The council had raised the base rate by 30 bp at their policy meeting in June and flagged the start of a tightening cycle amid spiking inflation.

CPI reached 5.1% in both April and May, and climbed to 5.3% in June, well outside of the central bank's 2%-4% tolerance band.

The council also decided on Tuesday to raise the O/N deposit rate by 30 bp to 0.25% and the O/N and one-week collateralised loan rates by 30 bp to 2.15%.

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 and preferential deposits.

Council indicates "firm" steps ahead

In a statement released after the meeting, the council reiterated its commitment to price stability and acknowledged upside risks to inflation.

"The council considers it justified to continue the cycle of interest rate hikes by taking firm steps on a monthly basis to ensure price stability, avoid second-round inflationary effects and to anchor inflation expectations," the statement said.

"The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy," it added.

CPI to decline "gradually" in coming months

MNB said rises in eurozone and U.S. inflation since the beginning of the year as well as "sustained rises" in commodity prices and international freight costs point to a higher external inflation environment, while in Hungary temporary demand-supply frictions amid the economic recovery, a tightening labor market in certain sectors and "dynamic" wage growth have increased inflation risks. 

The council said inflation is expected to "decline gradually" in the coming months but to remain over the 4% top of the tolerance band "until the end of 2021".

 "Inflation is then projected to fall back to the central bank tolerance band again at the beginning of 2022 and to stabilise around the bank target from mid-2022 as a result of the monetary policy tightening cycle," it added.

Long-term lending facility winds up

The council said the rate on the central bank's one-week deposit facility would again rise to match the base rate. 

It also said the MNB's quantitative easing program remains "crucial" among its set of monetary policy instruments.

"The [MNB] will continue to use the program by maintaining a lasting presence in the market, taking a flexible approach to changing the quantity and structure of weekly securities purchases, to the extent and for the time necessary," the council reiterated.

Policymakers also noted that the council had announced in June the termination of its FGS Go! credit scheme for SMEs, after the funding allocation was exhausted, adding that it "continues to phase out the instruments having an effect at longer maturities" in parallel with the tightening of interest rate conditions.

"As a next step", the council said the MNB will discontinue the use of its long-term collateralized lending facility immediately.

MNB announced the long-term, fixed-rate, collateralised lending facility in March 2020 as part of measures to ease strains in funding markets caused by the pandemic. The central bank had offered the facility with three maturities – one week, and three and five years – at weekly tenders held on Wednesdays.