Policymakers raise base rate 100 bp to 5.4%

MNB

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The Monetary Council of the National Bank of Hungary (MNB) decided to raise the central bank base rate by 100 bp to 5.4% at a monthly policy meeting on Tuesday, according to a report by state news wire MTI.

The policymakers maintained the pace of the tightening cycle amid accelerating inflation.

The council also decided on Tuesday to raise the O/N deposit rate by 100 bp to 5.4% and the O/N and one-week collateralized loan rates by 100 bp to 8.4%.

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.

War 'much higher risk than usual' for inflation outlook

In a statement released after the meeting, the council said the war in Ukraine has "posed a much higher risk than usual" to the outlook for inflation.

"The Monetary Council deems it necessary to continue the tightening of monetary conditions and to continue the base rate tightening cycle by taking a decisive step in order to anchor inflation expectations and mitigate second-round inflation risks," it added.

"Mitigating increased fundamental inflation risks and driving expectations appropriately make it necessary to continue the base rate tightening cycle in the coming period," the council said, reiterating its policy position.

The council also affirmed the MNB's commitment to ensuring market stability, in addition to its primary objective of price stability.

"If necessary, the MNB stands ready to intervene using every element in its monetary policy toolkit to ensure financial market stability," the rate-setters said.

"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," they added.

The policymakers said the base rate will "gradually catch up" to the level of the central bank's one-week deposit facility "in the coming months", adding that MNB "continues to stand ready to respond quickly and flexibly by setting the interest rate on the one-week deposit instrument if warranted by short-term risks in financial and commodity markets". The Council noted that the central bank "normally determines" the one-week deposit rate "on a monthly basis".

The one-week deposit rate has stood at 6.15% since shortly after the last monthly policy meeting late in March.

Scale of rate rises to be decided 'from month to month'

"We continued and, of course, will continue the fight against inflation," MNB governor György Matolcsy said at a press conference after the meeting.

He acknowledged the impact of government price caps on headline CPI but also pointed to a deterioration in the fiscal balance and the current account balance.

He noted that inflation, the budget balance, and the current account are challenges that are "closely connected" and said the central bank will propose to the government to return to an economic policy of balance.

He said the central bank is drafting a two-year "economic stabilization" program that it will recommend to the government in the coming weeks.

Matolcsy said the foundations for another tax reform should be "green, digital and concentrate on turnover-based taxes".

Deputy governor Barnabás Virág said the council continued its tightening cycle with a "resolute step" at the meeting on Tuesday.

He said CPI is expected to continue to climb and "exceed 9%" in April.

He put average annual inflation in "the upper third" of the 7.5-9.8% MNB forecast range. He added that the war in Ukraine could contribute 2.5-3 percentage points to headline CPI.

Virág said inflation could start to fall in 2023.

He said GDP growth could be in the "upper half" of the NBH's 2.5-4.5% forecast.

He said policymakers would decide on the scale of rate increases "from month to month", taking into consideration the inflation outlook and the risk environment. Among risk factors, he noted the war in Ukraine, the issue of balance addressed by Matolcsy and the state of talks on Hungary's European Union funding.

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