Policymakers raise base rate 30 bp to 1.5%


Photo by Adriana Iacob/

The Monetary Council of the National Bank of Hungary (MNB) decided to raise the central bank base rate by 30 bp to 1.5% at a monthly policy meeting on Tuesday, according to a report by state news wire MTI.

The council also decided on 30 bp base rate hikes at policy meetings in June and July, amid spiking inflation.

It also decided on Tuesday to raise the O/N deposit rate by 30 bp to 0.55% and the O/N and one-week collateralized loan rates by 30 bp to 2.45%.

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.

In a statement released after the meeting, the council reiterated its commitment to "maintaining price stability" and said it would perform a "comprehensive assessment" of the results achieved by the tightening cycle as well as "identify risks to the inflation outlook" in light of the central bank's next quarterly Inflation Report due out in September.

"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 said.

QE program to be gradually withdrawn

The council said it decided to "begin gradually withdrawing" its government securities purchase program "while considering aspects of maintaining market stability".

Instead of setting a cap for the entire stock purchased under the quantitative easing program, the council decided to set a target amount for weekly purchases.

From the week starting August 23, "as a first step", the weekly amount will be reduced from HUF 60 billion to HUF 50 bln.

"The bank may depart from this arrangement in a flexible manner, depending on the supply and other market conditions," the statement said.

The council will perform a comprehensive assessment of the QE program at the end of each quarter, starting in September 2021, setting a target amount for weekly purchases over the next quarter.

Purchases of shorter-term securities in the program will start to be reduced, the council said.

MNB "will continue to use the program taking a flexible approach to changing the quantity and structure of weekly purchases, to the extent and for the time necessary", the council noted, adding that "a stable liquidity position in the government securities market remains crucial from a monetary transmission perspective".

"The [MNB] will stand ready to temporarily raise the volume of weekly purchases at any given time to maintain market stability," the statement said.

"The central bank will not sell the stock of government securities on its balance sheet, purchased government securities will be held to maturity," it added.

MNB launched the QE program in the spring of 2020 "to prevent monetary policy transmission and manage economic and financial risks arising from the coronavirus pandemic". The total purchases made in the framework of the QE program reached HUF 2.953 trillion on August 22.

BGS allocation raised to HUF 1.55 tln

The council decided to raise the allocation for the MNB's Bond Funding for Growth Scheme (BGS) by HUF 400 bln to HUF 1.55 trillion.

MNB launched the BGS in the summer of 2019 with the aim of beefing up Hungary's relatively small corporate bond market.

By July, the central bank had purchased HUF 895 bln of BGS securities, including HUF 719 bln on the primary market and HUF 176 bln on the secondary market.

The council noted that it had indicated at the June policy meeting that instruments "supporting long-term sustainability" will "persistently" remain part of the central bank's tool chest, while "crisis management tools" are being withdrawn.

The condensed minutes of the meeting on Tuesday will be published at 2 p.m. on September 8.

MNB augurs spike in the fall

At a press conference after the meeting, MNB deputy-governor Barnabas Virág attributed the slowdown in annualized inflation to 4.6% in July from 5.3% in June "mainly to base effects" and warned against "overestimating" the significance of the decline.

He noted that the global rise in raw material prices impacting industrial goods prices is showing up in consumer price inflation in Hungary as in other countries.

He said the July inflation data suggest the first wave in price rises in the service sector resulting from the re-opening of the economy is "in large part" past.

"We are past the first spike in inflation, but it is clearly apparent that in the coming months inflation will continue to be over the top of the national bank's tolerance band and we can count on another spike in inflation in the course of October and November," he added.

Fielding questions, Virág said CPI could "even rise over 5%" during the autumn spike, but could fall into the 2%-4% tolerance band in the first quarter of 2022.

He added that the September Inflation Report would offer guidance on when CPI is expected to fall back to the 3% central bank mid-term target.

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