Inflation Risks Remain, Tightening Slows Down


The rate hikes introduced by the Monetary Council of the National Bank of Hungary (MNB) in the summer continued, but surprisingly, the central bank decided on September 21 to tighten by only 15 basis points. Immediately after the announcement, the forint started to weaken, as the market consensus had been for a rise of 25 basis points.

At its latest rate-setting meeting, the Monetary Council decided to raise the base rate and the interest rate corridor by 15 basis points, further reduce the weekly rate of government securities purchases, and remove the forint liquidity swap facility.

The base rate thus rose to 1.65%, the overnight central bank deposit rate to 0.7%, and the overnight secured loan and one-week secured loan interest rate to 2.6%.

Inflation will remain persistently high, above 5%, and will not return to the range defined by the MNB until next year, said Barnabás Virág, deputy governor of the central bank, at a press conference held after the Monetary Council meeting.

The deputy governor said that MNB would continue the cycle of raising interest rates until inflation is sustainably close to the 3% target, possibly by the second half of next year. Previously, the MNB expected inflation to return to the target range by mid-2022; inflation risks are still on the upside.

Economic Recovery

In the meantime, the recovery of the Hungarian economy continues at pace, with gross domestic product having reached its pre-pandemic level. This year’s GDP growth is predicted at 6.5%, and economists say a growth rate of between 5-6% could be realistic in 2022.

However, inflation jumped during the summer, with the current outlook expected to rise again, to more than 5%, and another inflation peak is likely to take place before the end of the year, at around 5.5- to 6%.

Core inflation is also rising: it could be as high as 4% in the coming months. The restart of the economy brought a sudden rise in prices in the service sector. For industrial goods, rising production costs are placing upward pressure on prices, analysts say.

Monetary tightening will continue in the near future. Based on this most recent decision by the Monetary Council, both the base rate and the interest rate corridor will increase in 15 basis point steps, and according to Barnabás Virág, this will continue to prevail in the coming months.

In addition to the interest rate increase, the central bank made two other important announcements. The swap facility providing forint liquidity will be phased out, and the monthly purchases in the government securities purchase program will decrease again, this time from HUF 50 billion to HUF 40 bln. The council will make decisions on further purchases in December.

More to Come

The last paragraph of the central bank’s announcement after the rate-setting meeting states that the interest rate hike cycle could continue in smaller increments. That could mean that the base rate would be 2.1% by the end of the year, Equilor’s analysts commented on the decision. According to them, annual average inflation is expected to reach 4.3% this year and fall to 3.3% next year.

Also commenting on the decision, Gábor Regős, head of macroeconomic business at research institute Századvég Zrt, said the central bank’s move was ambivalent: while the rate hike was smaller than many had predicted, the phasing out of the swap facility providing forint liquidity was unexpected.  

Overall, the market’s immediate reaction to the decision saw a weakening forint, which is explained by the smaller interest rate hike, as the other two tightening steps were not yet known at that time.

An important message to the market is that there will be further monthly tightening, based on which we expect an interest rate hike of 15 basis points in the coming months as well, Regős said. This could help stabilize the forint exchange rate and reassure the market, he added.

According to Gergely Suppan, senior analyst at Takarékbank, inflation could fall rapidly at the beginning of next year due to base effects. However, a likely significant increase in the minimum wage, the refund of personal income tax, the six-month bonus for law enforcement workers, the pension premium to be paid this year, and the 13th-month pension, will collectively increase household income by about HUF 1 trillion-1.1 tln.

That may give a significant boost to consumption and economic growth, but also inflation, the analyst cautioned.

Numbers to Watch in the Coming Weeks

Labor market statistics for August will be released on September 28. The Central Statistical Office (KSH) will publish the general government sector balance, referring to the second quarter of 2021, on October 1. Industry and retail trade figures for August will be out on October 6.

This article was first published in the Budapest Business Journal print issue of September 24, 2021.

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