The Monetary Council of the National Bank of Hungary (MNB) raised the base rate by 200bp to 9.75% at a non-rate setting meeting on July 12, in line with analysts’ predictions. The base rate has reached the level of the one-week deposit, which was raised by the same clip a week ago to prop up the forint

Policymakers upped the O/N deposit rate by 200bp to 9.25% and the O/N and one-week collateralised loan rates by the same clip to 12.25%, leaving further room for the MNB to continue its monetary tightening.

The EUR/HUF rate sank to 405 from 414 and the forint also firmed against the dollar and the Swiss franc on Tuesday.

In order to anchor inflation expectations and mitigate second-round inflation risks, it is warranted to raise the base rate to the level of the one-week deposit interest rate, the MNB said in a statement released after the meeting, which contained no new elements, according to analysts.

Inflation hit a 24-year high in June, rising to 11.7% and core inflation hit 13.8%, surprising to the upside.

The National Bank stands ready to respond quickly and flexibly by setting the interest rate on the one-week deposit instrument if warranted by the rise in short-term risks in financial and commodity markets, they added.

The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target sustainably and inflation risks become evenly balanced, Deputy Governor Virag Barnabas said after the meeting, adding that the MNB is ready to use every instrument in its monetary policy toolkit.

He acknowledged that the recently developed situation on FX markets "clearly puts price stability at risk", but said there was "no consequential spillover" to other markets. On the swap market, long-term yields were stable, while a temporary divergence for short-term yields was managed by the MNB's swap tenders, he said.

Virag noted that the coordination of fiscal and monetary policy in the current environment is "extremely important", adding that an improvement in balance indicators increases the effectiveness of the monetary policy.

The central bank’s rate hike was expected, as policymakers flagged the convergence of the base rate and one-week deposit rate at earlier sessions.

The continuation of the monetary tightening cycle could push the benchmark one-week deposit rate and the base rate to 11.75% in the autumn months, depending on where inflation peaks, Magyar Bankholding analyst Gergely Suppan said.  The MNB could start easing monetary policy in the middle of 2023, bringing the rates down to 8.5% at the end of 2023. ING Bank said the base rate could peak at 13% this year.