The Monetary Council of the Hungary National Bank (MNB) raised the base rate by 100bp to 11.75%, in line with analysts’ consensus and at the same clip as a month ago as it bid to continue the fight against surging inflation, which could hit 20% at the end of the year. The forint rallied on the news, closing its best day in seven weeks with a gain of 1.5% against the euro.

The MNB has lifted the base rate by 1,100bp from 0.75% since June 2021, when it began its monetary tightening, being a frontrunner among European central banks. The base rate stands at its highest level since April 2004 and at present it is the highest in the CEE region.

The Monetary Council also decided on Tuesday to raise the O/N deposit rate by 100bp to 11.25% and the O/N and one-week collateralised loan rates by 100bp to 14.25%, paving the way for the hike in the one-week deposit rate later this week.

In a statement after the meeting, the Monetary Council flagged further hikes, saying the tightening cycle will continue until the outlook for inflation stabilises around MNB’s 3% target sustainably.

The MNB will take measures to reduce excess liquidity to the market to improve monetary transmission, Deputy Governor Barnabas Virag told reporters in an online presser.

The MNB had pumped around HUF11trillion (€27bn) of extra liquidity into the economy during the pandemic, but with interest rates rising this liquidity needs to be managed, he added.

The MNB will raise the required reserve ratio set for the banking system. Additionally, central bank discount bill auctions will be held regularly and the MNB will also introduce a long-term deposit instrument in order to sterilise liquidity in the banking system.

Mandatory reserves of banks will be raised from the current 1% to 5%, checked on a daily basis.

Consumer prices could rise by around 15-16% y/y in August, as repricing continues, Virag said when asked about the end of the rate hike cycle. He would not go into speculation on year-end inflation, citing great uncertainties.

"The key will be the evaluation of inflation prospects and second-round effects, as well as seeing how Hungary's negotiations on an agreement with the European Commission on funding matters develop", he noted.

Headline inflation in July soared to 13.6%, while core inflation rose to 16.7%.

The MNB will need to keep its powder dry for the period ahead, as inflation could soar to 20% at the end of 2022 and in a period when the current account and budget deficits are widening due to soaring energy prices in Europe, brokerage Almundi said in a note.

K&H Bank projects the base rate to peak at 14% and to remain there until mid-2023, with the first easing expected in June 2023. The baseline scenario of the bank is based on the assumption that the EUR/HUF rate stabilises, which would require the government to reach an agreement with the European Commission on EU standards and subsidies.

The forint, which has underperformed regional peers by losing 8% to the euro this year, rallied after the MNB rate-setting meeting. It gained more than 1.6% to the dollar and 1.5% to the euro.