Policymakers raise base rate 15 bp to 1.65%


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The Monetary Council of the National Bank of Hungary (MNB) decided to raise the central bank base rate by 15 bp to 1.65% at a monthly policy meeting on Tuesday, according to a report by state news wire MTI.

The council slowed the pace of the central bank's tightening cycle after deciding on 30 bp base rate hikes at policy meetings in June, July, and August, amid spiking inflation.

The council also decided on Tuesday to raise the O/N deposit rate by 15 bp to 0.7% and the O/N and one-week collateralized loan rates by 15 bp to 2.6%.

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.

Tapering continues, liquidity facility to be phased out

In a statement released after the meeting, the council said upside risks surrounding the inflation outlook parallel with risks to the economic recovery posed by the fourth wave of the pandemic "warrant a continuation of the monthly interest rate tightening cycle", albeit "with smaller increments".

The rate-setters also announced further tapering and said the central bank's FX swap facility for providing forint liquidity would be gradually phased out.

The council decided to lower the weekly target amount for purchases of government securities in the MNB's quantitative easing program from HUF 50 bln to HUF 40 bln from the week starting September 27.

The council had reduced the weekly QE target from HUF 60 bln to HUF 50 bln at a policy meeting in August.

On Tuesday, the policymakers said they would next set a weekly target for the following quarter in December.

They reiterated that the MNB will continue to take "a flexible approach to changing the quantity and structure of weekly purchases, to the extent and for the time necessary" and "will stand ready to temporarily raise the volume of weekly purchases at any given time".

The council said the FX swap facility providing forint liquidity would be gradually phased out "taking into account the developments in the swap market".

"The Monetary Council will continue the cycle of interest rate hikes 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," the policymakers added.

At a press conference after the meeting, MNB deputy-governor Barnabás Virág said the 15 bp rate rise in September would be a "guide" for increases in the coming months. Fielding questions, he said the next "milestone" with regard to the scale of rate rises would be the publication of the central bank's next quarterly Inflation Report in December.

CPI set to climb over 5%

Commenting on the MNB's latest quarterly Inflation Report, the council said CPI is "expected to rise further in the autumn months and to stay above 5% during the remainder of the year". 

The gradual pass-through of increased commodity prices and freight costs into industrial goods prices is expected "to be decisive" in case of underlying inflation, while core inflation is expected to rise "close to 4%" during the rest of the year.

The policymakers said the effects of the MNB's tightening cycles "will be clearly felt" in 2022, as inflation starts to fall "from the beginning of 2022", then returns to the central bank's 2%-4% tolerance band "in the second quarter". CPI is expected "to stabilize around the 3% central bank target" in the second half of 2022, they added.

MNB published the main forecasts from the fresh Inflation Report on Tuesday and will release the full report on Thursday.

The central bank puts average annual inflation in a range of 4.6-4.7% for 2021 and 3.4-3.8% for 2022. The forecasts were raised from 4.1% for 2021 and 3.1% for 2022 in the previous Inflation Report published in June.

MNB augurs a faster recovery in the latest report, putting GDP growth at 6.5-7% in 2021. Hungary's economy is set to expand 5-6% in 2022.


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