Key Rate Remains Unchanged, No Easing in Sight


The National Bank of Hungary (MNB) left its key rate unchanged at the first rate-setting meeting of 2023 on January 24, which was in line with analysts’ expectations. The decision signals that the MNB will continue its tight monetary policy.

It is necessary to maintain the strict monetary policy in the long-term, which ensures the anchoring of inflation expectations and the ability to achieve the inflation target in a sustainable manner, the Monetary Council of the MNB reasoned in its first interest rate decision of the year, when it kept the central bank base rate at the 13% level.

The last time the council raised the key rate was in September 2022. The board did not modify either side of the interest corridor, and the decision met analysts’ expectations.

The primary goal of the MNB is to achieve and maintain price stability, the bank said in its statement. It supports the maintenance of financial stability and the government’s economic policy, as well as its goals related to environmental sustainability, without jeopardizing the central bank’s primary goal, it wrote.

Listing the factors that continue to contribute to substantial uncertainty, the MNB mentioned that the global economy had started to slow down recently, gross domestic product had declined in many countries, the ongoing Russo-Ukrainian war, the European energy crisis, and the generally rising interest rate environment. Although raw material and energy prices have decreased significantly in recent months, they are still at high levels compared to previous years.

While the base rate remained at its previous level, a significant change was announced at the meeting. The MNB will continue to increase the required reserve ratio: from the beginning of April, it will raise its level to 10% from the previous 5%, and from the beginning of February, it will launch discount bond auctions on a weekly basis.

The goal is to ensure that the interest conditions determined through the one-day deposit rate are enforced as effectively as possible, MNB deputy governor Barnabás Virág said.

Inflation Turning Point?

He pointed out that the effects of disinflation will intensify in the coming months, the background of which, in addition to base effects, is lower raw material prices and electricity and gas consumption.

He noted that a turnaround is also emerging in the development of food costs; prices have already started to decrease in the grain market, but similar processes are expected in other sub-markets. In addition, from the domestic side, the narrowing of retail trade also acts as a “disciplining force” on pricing, he added.

He reminded that the central bank and the economic competition authority GVH cooperate closely in breaking down price increases above costs. He recalled that inflation reached 24.5% in December; the two percentage point increase compared to November was caused by the removal of the fuel price cap, the effect of which extends into January as well, he underlined.

The slowdown in economic growth continued, as there was a decline in two consecutive quarters [editor’s note: the fourth quarter GDP data will be published in February], but at the same time, there is a good chance that the indicator will remain in the positive range for the whole of 2023, Virág said.

The MNB continues to pay particular attention to the external and internal risk factors defined earlier, he stated. He added that the “horror” of the energy crisis has decreased, but at the same time, the end of the Russo-Ukrainian war is not yet in sight, and the largest central banks are still tightening for the time being.

Analysts Unsurprised

According to Magyar Bankholding’s head analyst Gergely Suppan, inflation may turn around from the beginning of the year due to increasingly strong base effects, to which the recent sharp drop in energy prices may even pose a downside risk.

Suppan expects the base interest rate to be reduced from the middle of 2023, which may be more significant in the last quarter as the rate of inflation decreases, so that it may drop to 9% by the end of 2023.

An easing of monetary conditions is not expected in the first quarter. It will come only after a substantial slowdown in inflation, commented Gábor Regős of Makronóm Institute. Even then, the one-day deposit rate is expected to be lowered first, and only after that can we expect the base rate to be reduced, he said.

According to him, the January data will be of outstanding importance in the development of inflation in 2023, as the revaluations at the beginning of the year will affect the exchange rates for the whole year.

According to Regős, there is no big surprise in the commentary on the interest rate decision; it suggests the maintenance of the current monetary conditions. At the same time, the analyst said that the central bank’s press release lists factors that are optimistic about inflation and that influence it in a favorable direction.

Numbers to Watch in the Coming Weeks

December retail trade data will be published on February 6, and the Central Statistical Office will release the December industrial output figures on February 7. The much-awaited January inflation data will be out on February 10.

This article was first published in the Budapest Business Journal print issue of January 27, 2023.


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