MNB dep-gov flags smaller rate rise at May policy meeting

MNB

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The pace of the central bank's tightening cycle could be "halved", National Bank of Hungary (MNB) deputy-governor Barnabas Virág told MTI on Tuesday, a week ahead of the central bank rate-setters' next monthly policy meeting, according to a report by state news wire MTI.

"After the 100 bp rate rises in the past two months, decided on under extraordinary conditions, the appropriate option could be to continue the cycle of rate rises at about half the pace," Virág said.

"The exact scale of the next step will be taken at the Monetary Council's rate-setting meeting at the end of May," he added.

Virág stressed that stopping climbing inflation and achieving the MNB's mid-term 3% inflation target is the central bank's "primary goal, superseding everything else". MNB will continue to "gradually" raise the base rate, which will require "resolute" steps, he added.

He pointed out that raising interest rates is "the strongest line of defense" in the fight against inflation while acknowledging that rate rises cannot provide short-term protection against inflationary pressure caused by crises on global commodities and food markets or supply chain problems.

He said inflation in Hungary would climb "into the double digits" in the coming months, as in other countries in the region, but "that doesn't justify reacting by raising interest rates into a similar range", he added.

Virág said steps against "self-reinforcing inflation", emerging through inflation expectations, are "mandatory and necessary".

He said a package of recommendations extending to 12 policy areas MNB unveiled in the previous week aims to re-establish the balance while advancing Hungary to the average stage of development in the European Union by the end of the decade.

The "balance and growth" formula that worked in the 2010s must be "further developed" with a strategy of "sustainable balance and convergence", he said. "We have to keep what works and fix what is broken while activating new growth resources in a number of areas," he added.

Full employment, high investment activity, growing financial wealth, and the stability of the financial system must be maintained, while the growth model needs to be based on improved productivity, increased efficiency, and a higher rate of domestic value-added, Virág said.

"The successful implementation of the digital and green transition will be key, and the continuous development of knowledge, talent, technology, and capital is the road that leads there," he added.

In the short term, he said restoring balances will be "the most important task": reducing the fiscal and current-account deficits "as soon as possible", while also applying the brakes to inflation. 

Because of the "extraordinary global economic environment", inflation and the current account balance could "remain under pressure for months", which is why work must start on the expenditure side of the budget, he added.

Taking the "appropriate" fiscal measures this year could achieve a "significant improvement" and, with time, favorably impact the current account balance and inflation, too, Virág told MTI.

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