Central Bank Finally Announces Much-awaited Move


The National Bank of Hungary (MNB) started to reduce the one-day deposit tender interest rate at its latest rate-setters’ meeting. The move came as no surprise; the base rate, however, will remain at its current 13% level for a more extended period, according to central bank governor György Matolcsy.

The MNB announced after its latest rate-setting meeting on May 23 that it would reduce the one-day deposit tender interest rate (which is basically the effective interest rate) and the one-day secured loan interest rate by 100 basis points. The decision met preliminary expectations.

In the accompanying statement, the central bank continues to emphasize the importance of a cautious approach. The MNB “continuously evaluates” the incoming data and the evolution of inflation prospects and follows the effects of international financial market processes on the domestic risk environment with special attention, the bank wrote in a statement released after the decision.

If the improved risk assessment remains long-term, the MNB will continue to gradually lower the interest terms of the one-day tender to the base rate.

The stability of the domestic financial markets had improved “permanently” and “significantly” in the past period due to external and internal factors, the MNB highlighted in its announcement.

According to the central bank, recent banking system problems in developed countries have had no global spillover effects. Investors’ perceptions of emerging markets had generally strengthened. The risk of a European energy crisis has decreased, while the balance of Hungary’s current account shows a significant and “trend-like” improvement.

Inflation Still the Enemy

The capital and liquidity situation of the domestic banking system is stable. At the press conference following the interest rate decision, MNB governor Matolcsy underlined that inflation is still a “close enemy” and that the central bank will do everything possible against it.

It continues to pursue a strict and consistent monetary policy; there is no talk yet – and nor will there be for a long time – of lowering the base rate. The central bank governor thinks that fiscal policy is consolidating so that it can be aligned with monetary policy.

Matolcsy also mentioned why he believes inflation is still higher in Hungary than in other countries in the region. He pointed to several reasons specific to Hungary, including the high deficit of the 2021 budget and the food price caps; the latter had helped in the fight against inflation in the short term but increased it in the long run.

Therefore, he again asked the government to drop price regulation as soon as possible. At the end of his speech, he stated that neither 24%, 14%, nor high single-digit inflation is acceptable in the long term (the central bank’s official inflation target is 3%, with a tolerance band of 1% on either side).

Although inflation reached its high water mark in January, the rate is still skyrocketing. In April, inflation calculated on an annual basis was 24%, food prices rose by 37.9%, household energy by 41.8%, consumer durables by 9.3%, and services by 14.1 %. Core inflation is still extremely high, at 24.8%, only 0.9% down from the peak, while the fall in headline inflation was 1.7%.

In any case, the signs we have crested the peak are already visible, which is undoubtedly good news. Still, it is expected that achieving the goal set by the government (that inflation should be in single digits by the end of the year) will not be simple, Equilor analysts say.

Single-digit Interest Rate?

According to the assessment of experts at the banking news portal, the interest rate reduction that has now started as expected could lead to the benchmark interest rate reaching the base rate of 13% by the beginning of the fall. If this happens, the base interest rate may drop below 10% by the end of this year or the beginning of 2024.

The gradual reductions of the key interest rate and then the base interest rate, expected to be 1% per month, will also impact interbank interest rates, thus allowing banks to start reducing interest rates on household and corporate loans. This process can be implemented gradually, in parallel with the central bank’s steps, analysts say.

“Despite the expected continuation of the reduction of the benchmark interest rate, we do not expect a significant weakening of the forint exchange rate,” Gergely Suppan, head economist at MBH Bank, commented on the decision.

As a result of the double effects, the exchange rate of the forint may stabilize slightly below the level of 380 by the end of the year, Suppan thinks. He adds that swings cannot be ruled out in either direction, but they may be much smaller compared to last year’s turbulence. Unexpected international market turbulence may lead the forint exchange rate in a weaker direction, while access to EU funds could see it strengthen, he noted.

In the meantime, surprising investment data has been published by the Central Statistical Office (KSH). The volume of investments increased by 1% in the first quarter of this year from the previous quarter, while, based on year-on-year data, investment volume shrank by 2.8%.

Investments were able to rise again after two quarters of decline, and the turnaround is somewhat unexpected, especially in light of how poorly last year’s fourth quarter turned out. Based on the budget adjustment, the lack of EU funds, and the high interest rates, it had been deemed more likely that the decline would continue ahead of the news from the KSH.

This article was first published in the Budapest Business Journal print issue of June 2, 2023.

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