Policymakers raise base rate 30 bp to 2.1%


Image by Jessica Fejos

The Monetary Council of the National Bank of Hungary (MNB) decided to raise the central bank base rate by 30 bp to 2.1% at a monthly policy meeting on Tuesday, according to a report by state news wire MTI.

The policymakers accelerated the tightening cycle following 15 bp hikes in the previous two months after October CPI spiked at 6.5%.

The council also decided on Tuesday to raise the O/N deposit rate by 30 bp to 1.15% and the O/N and one-week collateralized loan rates by 30 bp to 3.05%.

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 flags 'more extensive, longer lasting' tightening

"A persistent rise in external inflationary pressures and increasing second-round inflation risks have necessitated more extensive and longer-lasting monetary policy tightening," the council said in a statement released after the meeting.

The policymakers also signaled a continuation of monthly hikes, while noting that the central bank's next quarterly Inflation Report, due out in December, "will be decisive in determining the further extent of interest rate hikes".

"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 rate-setters said, reiterating their earlier policy stand.

November CPI set to rise over 7%

The council said CPI is "expected to rise above 7%" in November and "decline only slowly" from the end of 2021, adding that inflation in 2022 is expected to be "substantially higher" than the projection in the September Inflation Report.

"Higher-than-expected and sustained increases in commodity prices are rapidly being incorporated into consumer prices in a buoyant domestic demand environment, leading to rising inflation in general," the council said.

"Persistently high commodity and energy prices, rises in international freight costs and increasingly wider supply disruptions continue to point to a higher and more persistent external inflation environment. The tight labor market, coupled with strong wage growth and a higher inflation environment, may lead to increases in inflation expectations and to strengthen second-round inflation risks," the council added.

At a press briefing after the meeting, MNB deputy governor Barnabás Virág said external factors account for 60% and internal factors for 40% of inflation at present. He added that both external and internal factors show upside risks.

Fielding questions, he said a HUF 480/liter government cap on retail vehicle fuel prices has no impact on monetary policy.

MNB ready to raise 1-week depo rate over base rate

The council noted that the base rate tightening cycle is its response to "longer-term internal fundamental changes in the outlook for domestic inflation" and said it intends to "shape [inflation] expectations appropriately" by continuing to raise the key rate.

The council also said MNB must respond to a recent increase in short-term risks in financial and commodity markets "quickly and flexibly", adding that it "must be ready to set the interest rate on the one-week deposit above the base rate".

The rate for MNB's one-week deposit facility has moved in tandem with the base rate since late June.

The council said the rate for the facility will continue to be set at weekly tenders.

Virág said the MNB will react "quickly and flexibly" at the next tender for the one-week deposit on Thursday.

FX swap facility to cease

MNB will cease to use its FX swap facility in a move to reduce liquidity in the banking system, the council said.

At the policy meeting in September, the council said MNB would "gradually phase out" the swap facility, and at the policy meeting in October, rate-setters said they would continue the phase-out "in a dynamic way".

The swap facility was introduced earlier to pump liquidity into the banking sector. The stock of FX swaps will fall to around HUF 764 bln on Wednesday.

The council said MNB will introduce a new, limited, occasional and short-term central bank discount bill that supports the effective sterilisation of liquidity in the financial system. MNB will also modify its foreign exchange balance ratio to provide more room for banks' activity on the FX swap market, the council added.

In a separate statement, MNB said it will provide the discount bill, with a maturity of up to one month, to banks with a quantitative limit. The facility will allow banks to manage their existing positions "in a predictable way" in periods of low liquidity at the end of the quarters, it added.

The first discount bill auction will be held in December with a maturity extending beyond the end of the year.

In a separate statement, MNB said its Financial Stability Board decided to cut the minimum level for the foreign exchange coverage ratio, which limits on-balance sheet open FX positions as a percentage of the total balance sheet, to -15% from -30% in the case of an FX liability surplus and to leave it unchanged in the case of an FX asset surplus.

The asymmetrical modification "will provide more room for banks' FX swap market activity without causing a significant increase in systemic risks", it added.

The amendment of the decree on the threshold is expected to come into force in early December, after consultations with the European Central Bank wind up, MNB said.

The minutes of the meeting on Tuesday will be published at 2 p.m. on December 1.


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