Policymakers raise base rate 50 bp to 2.9%


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The Monetary Council of the National Bank of Hungary (MNB) decided to raise the central bank base rate by 50 bp to 2.9% at a monthly policy meeting on Tuesday, according to a report by state news wire MTI.

MNB accelerated the pace of its tightening cycle from a 30 bp increase at the previous policy meeting after December inflation remained stubbornly high at 7.4%.

The council also decided on Tuesday to raise the O/N deposit rate by 50 bp to 2.9% and the O/N and one-week collateralised loan rates by 50 bp to 4.9%.

The O/N deposit rate and the collateralised 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 rate rises bigger than Dec hike

In a statement released after the meeting, the council said risks to inflation "continue to be on the upside", adding that the risk of the central bank's alternative scenario assuming a higher external inflation environment "has increased".

"Persistently high commodity, crop, food, and energy prices and elevated international freight costs continue to point to sustained external inflationary pressures," the council said.

"At the same time, the tight labour market, coupled with accelerating wage growth and a higher inflation environment, may lead to a further rise in inflation expectations and an increase in second-round inflation risks," the policymakers added.

"Mitigating second-round inflation risks and driving expectations appropriately have necessitated the continuation of the base rate tightening cycle on a monthly basis and in greater increments than in December. As a result, the base rate will catch up gradually to the one-week deposit rate evolving in the coming months," the council said.

The one-week depo rate moved in tandem with the base rate from June until November, when the council decided the central bank must be allowed to be set it over the base rate to respond to an increase in short-term risks in financial and commodity markets "quickly and flexibly". The rate now stands at 4%.

Base rate, 1-wk depo rate could converge in H1

At a press conference after the meeting, MNB deputy-governor Barnabas Virág said the MNB is prepared to raise the one-week deposit rate further. He added that the base rate has "started to catch up" with the one-week deposit rate.

He noted that the central bank aims to change the one-week deposit rate once a month but stands ready to use the instrument "flexibly" and could modify it more frequently, if necessary.

He said the base rate and the one-week deposit rate "could converge in the course of the first half of the year".

Headline inflation is "close to plateauing", Virág said. If re-pricing that was brought forward took place in November and December, price increases early in 2022 could be "more moderate" and inflation could slow more quickly; however, if re-pricing remains high early in the year, the "inflation plateau" could be drawn out, he added.

He noted that core inflation "rose significantly" in December and MNB projects the trend will continue early in 2022. Core inflation "could reach 7%, too", he added.

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