Base Rate Hikes Continue as Inflation Soars

The Monetary Council of the National Bank of Hungary (MNB) raised its base rate by 100 basis points to 5.4% at its latest rate-setting meeting. The move was in accordance with analysts’ expectations, but its extent was more significant than the usual 50 bp hikes that have typified the past months.

The MNB also announced its one-week deposit tender at 6.45% a few days later, 30 percentage points higher than the previous week. The central bank has indicated that the base rate will gradually catch up with the level of one-week deposit rates in the coming months. Analysts say this is likely to be at around 7% in the summer months.

Gergely Suppan of Takarékbank said that due to the increase in inflation risks, the central bank base rate could rise to as high as 7% by the middle of the year, but it could only be expected to reduce again from the second half of 2023 at the earliest. He expects one-week deposit rates to reach 7% in June.

He recalled that the MNB had recently separated the effective one-week deposit rate from the base rate and had also widened and made the interest rate corridor asymmetric in order to increase its room for maneuver. He pointed out that natural gas, electricity and oil prices plummeted in the fall of last year, leading to significant inflationary pressures while maintaining household energy prices.

Don’t Over-tighten

As a result of the war in Ukraine, the prices of energy, raw materials and food continued to rise, he added. Current global inflation will be boosted mainly by a sharp rise in the cost of living, but this in itself will dampen economies as a result of declining purchasing power, he said. Therefore, in his opinion, it is also worth avoiding over-tightening the monetary conditions, which puts central banks in a more difficult situation.

Gábor Regős, head of the macroeconomic unit of research institute Századvég, drew attention to the fact that the Monetary Council continues to emphasize the reduction of the difference between the one-week deposit rate and the base rate and further tightening.

There is nothing new in the announcement, he noted. Monetary policy alone will not be able to return inflation to the central bank’s 2-4% target band, he highlighted from the Monetary Council’s statement. The analyst expects similar steps next month, with a further decision expected in June based on new data and the quarterly Inflation Report.

He noted that, in addition to tackling inflation, the task of economic policy is to improve the other two problematic balance indicators: the budget deficit and the current account. To that end, the central bank would surely make proposals to the government soon, he added.

According to Zoltán Varga, senior analyst at Equilor Befektetési Zrt, inflationary pressure may persist in the coming months, and the rate of price increases may soon exceed 10%.

Growth Capacity

According to the MNB, the growth capacity of the Hungarian economy remains strong. Depending on the course of the war and the policy on sanctions, GDP growth will be slower than previously expected, in the range of 2.5-4.5% in 2022, 4-5% in 2023, and 3% in 2024.

Ensuring the stability of the government securities market remains key to the MNB. Accordingly, the Monetary Council is ready to intervene with government securities purchases if necessary, it said in its statement following the rate-setting decision.

It warned that the Russo-Ukraine war would increase fiscal risks through multiple channels while maintaining budget deficit targets amid strong nominal growth could ensure a further decline in the debt ratio from 76.8% at the end of last year.

In the meantime, analysts polled by Magyar Bankholding gave a very optimistic scenario for the near future. According to Suppan, GDP growth of 5.9% is expected this year. Investments at the national economy level may continue at a dynamic pace, and wages may also rise significantly in 2022, although the Hungarian economy will have to cope with a challenging external environment due to the effects of the war, he noted.

IMF Lowers Projection

Hungary and Poland will achieve the highest gross domestic product growth this year in the Central and Eastern European region, according to the World Economic Outlook (WEO) report of the International Economic Fund (IMF), published in April. However, economic growth in both countries will be lower than projected in the October forecast. The organization estimates Hungary’s GDP will grow by 3.7% this year and 3.6% next. Previously, the IMF had expected 5.1% growth in 2022 after last year’s 7.1% expansion. Inflation could accelerate to 10.3% this year, up from 5.1% last year and well above the 3.6% predicted in October. Next year, the pace will slow to 6.4%, according to the latest forecast.

Numbers to Watch in the Coming Weeks

The first estimates of how Hungarian industry performed in March will be published by the Central Statistical Office (KSH) today (Friday, May 6), with the second estimate of the data on May 13. April consumer prices will be released on May 10.

This article was first published in the Budapest Business Journal print issue of May 6, 2022.