Surprise Bigger Rate Hike is a Response to Soaring Inflation

Decision-makers raised the base interest rate for an eighth consecutive month on Jan. 25 after inflation failed to slow at the end of the year. However, to the surprise of most analysts, the Monetary Council of the National Bank of Hungary (MNB) raised the base rate by 50 basis points at its regular rate-setting meeting, exceeding the 30-basis-point pace that had been applied at previous rate hikes.

Takarérbank’s senior analyst Gergely Suppan said most analysts were surprised by the extent of the hike. The forint reacted to the decision less strongly than might have been expected, but its exchange rate is currently driven mainly by geopolitical risks due to the possibility of a Russian-Ukrainian conflict and the resulting risk aversion, he emphasized.

Takarékbank analysts forecast the base rate may reach 4% in the first four months of the year and may remain at this level until the end of 2022, while the one-week deposit rate may increase to 4.75-5%, depending on the inflation rate.

According to fresh data from the Central Statistical Office, consumer prices increased by 7.4% in December and by 5.1% on average in 2021.

According to Zoltán Varga, a senior analyst at Equilor Befektetési Zrt, the MNB may raise the current one-week deposit interest rate (which was at 4% on Tuesday) by less than 50 basis points in the one-week deposit tender due on Jan. 27, after this issue goes to print, based on central bank communications.

He also pointed out that inflation reached 7,4% at the end of last year. In the coming months, we’ll find out whether it has peaked and how effective the government’s and national bank’s measures to curb the process have been.

Slowing the Pace?

Last year’s base will rise significantly from April, so this may also slow the pace of price increases in the spring. Some upside risks remain, as oil prices are rising again, but the significance of imported inflation has declined due to the strengthening of the forint at the beginning of the year, Varga said.

“The decision came as a big surprise,” Péter Kiss, investment director at Amundi Fund Management, said, commenting on the interest rate decision. “However, in the light of the higher-than-expected inflation rate in December and the increased market volatility since the beginning of the year, the MNB may have thought that it was worth taking a stronger step,” he said.

Amundia expects the base rate to rise to 3.9% on a 50-basis point monthly basis by the end of the first quarter and to reach around 4.5% at the end of the half-year, while the current spread between the one-week deposit rate and the base rate may persist.

Erste Bank’s analyst János Nagy also emphasized that the tightening cycle would continue on Jan. 27, when the interest rate on the one-week deposit tender is announced, though presumably to a lesser extent than at present, and then on a monthly schedule.

The December consumer price index data has somewhat redrawn the previously projected inflation trajectory, and price pressures do not appear to have eased for the time being; although the headline figure may gradually decline during the year, the core inflation rate is expected to rise in the first half of the year.

Further Tightening

According to Gábor Regős, head of the macroeconomics unit of economic think-tank Századvég Gazdaságkutató Zrt, the MNB tightened more than expected due to higher-than-expected core inflation, which could have a beneficial effect on the forint exchange rate.

The key interest rate may continue to catch up with the one-week deposit rate in the coming months. Still, the exact evolution of monetary conditions will be strongly influenced by incoming inflation data, especially in January. However, that catching up process also means the one-week deposit rate will rise less than the base rate. Raising the top of the interest rate corridor by 50 basis points provides an opportunity for further tightening. The exceptionally low base rate is not likely to recover in the short term, Regős reckons.

Monetary tightening will continue at a faster pace than in December last year, raising not only the base rate but also the one-week deposit rate Barnabás Virág, deputy governor of the MNB, confirmed at an online press conference following the policymakers’ meeting.

According to Virág, the January data will be the starting point in the coming months. He added that the level of the base rate would gradually reach that of the one-week deposit rate, adding that the narrowing of the spread between the two rates started already in January and may end in the first half of the year, according to the current outlook.

The deputy governor pointed to monthly decisions, such as changing the one-week deposit rate. At the same time, the asset will continue to be managed flexibly, and if necessary, the policymakers “will not hesitate” to intervene. He pointed out that there could be no rapid success in the fight against inflation. “You have to prepare for a prolonged fight,” he warned.

Numbers to Watch in the Coming Weeks

December retail trade figures will be out on Feb. 3, followed on Feb. 4 by the first estimate of December’s industry data from the Central Statistical Office.

This article was first published in the Budapest Business Journal print issue of January 28, 2022.