Policymakers raise base rate 50 bp to 3.4%

MNB

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The Monetary Council of the National Bank of Hungary (MNB) decided to raise the central bank base rate by 50 bp to 3.4% at a monthly policy meeting on Tuesday, according to a report by state news wire MTI.

Policymakers continued their tightening cycle at the same pace as a month earlier.

The council also decided on Tuesday to raise the O/N deposit rate by 50 bp to 3.4% and the O/N and one-week collateralized loan rates by 50 bp to 5.4%.

The O/N deposit rate and the collateralized loan rate mark the bottom and the top, respectively, of the central bank's "interest rate corridor". The base rate is paid on mandatory reserves and preferential deposits.

Monthly rate rises to continue

In a statement released after the meeting, the council said "the risks to the outlook for inflation have increased and continue to be on the upside", while "persistently high" commodity, crop, food and energy prices and elevated international freight costs "continue to point to sustained external inflationary pressures". The tight labor market, coupled with accelerating wage growth and a higher inflation environment, "may lead to a further rise in inflation expectations and an increase in second-round inflation risks", it added.

Headline inflation "will begin to decline later than previously expected" while core inflation "may pick up further in the coming months", the council said.

The policy makers said companies are repricing goods and services "at relatively short notice" amid strong domestic demand, as well as higher commodity prices and wage costs.

"The degree to which repricings take place in the coming months will determine the yearly dynamics of both inflation and core inflation," they added.

The council said inflation risks warrant a further tightening of monetary conditions, adding that they deem it "necessary to continue the base rate tightening cycle on a monthly basis while gradually raising it to the level of the one-week deposit rate".

"The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy," the policy makers reiterated.

In line with the tightening monetary policy stance, the rate-setters decided to phase out the central bank's preferential deposit related to earlier tools supporting lending activity from April 1, 2022.

February CPI could top 8%

At a press conference after the meeting, MNB deputy governor Barnabás Virág said year-on-year inflation is expected to continue climbing in February after reaching 7.9% in January. He said headline CPI for the month is "expected to be over 8% and could be close to 8.5%".

He said "broad" repricing of goods services is taking place at a "much higher scale than usual", noting that the degree of repricing in January was "three times" the normal.

He also pointed to strengthening geopolitical risks, continued high volatility on markets and the start of tightening cycles by big central banks among factors that necessitate the continued, predictable tightening of monetary conditions in Hungary.

Virág acknowledged the dampening effect of government price caps on vehicle fuel and some staple foods, as well as the regulated utilities price scheme for households, on pass-through of global commodity price rises to domestic inflation. 

He added that "predictable" and "resolute" monetary policy steps are "key in a fast-changing environment", noting that the struggle with inflation will be "a long road, a long process of which the precise end still isn't known".

The minutes of the meeting will be published at 2 p.m. on March 9.

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