Rate-setters Augur Faster Disinflation From Mid-2023

Analysis

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Members of the Monetary Council of the National Bank of Hungary (MNB) said disinflation was expected to accelerate from the middle of the year at a monthly policy meeting in February, according to a report by state news wire MTI.

"Decision makers pointed out that looking ahead, disinflationary effects were expected to increase in the coming months. After peaking and then gradually moderating in the first half of 2023, from the middle of the year domestic inflation was expected to decline more markedly, which was also supported by the fading of base effects," the minutes from the meeting published on Tuesday show.

Hungary's CPI ticked down 0.3 percentage points to 25.4% in February, largely driven by a 0.5 pp drop in motor fuel prices and a 0.2 pp decline in processed food prices.

Council members acknowledged that a decision to apply a tiered structure to mandatory reserves, in which interest is paid only on reserves over the 2.5% threshold, parallel with an increase in the mandatory reserve ratio from 5% to 10% would strengthen monetary transmission, according to the minutes. Some members stressed that in spite of the higher reserve ratio, there would be "ample liquidity" in the banking system.

The minutes show the council voted unanimously to keep the central bank base rate at 13%. The policymakers also all agreed that the outlook for inflation warranted keeping the base rate at its current level for a "prolonged" period" and they were of the view that maintaining the 18% rate on O/N deposits at quick tenders "remained necessary".

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