Hungary’s central bank announces package of tightening measures

Hungary’s central bank announces package of tightening measures
MNB Governor György Matolcsy
By bne IntelliNews December 14, 2021

The Monetary Council of the Hungarian National Bank (MNB) raised the central bank base rate by 30 bps to 2.4% at a monthly policy meeting on November 14, in line with forecasts.

The scale of the rise matched the one a month earlier and came after November inflation spiked at 7.4%, a 14-year high. Policymakers expect the headline inflation to fall below the tolerance band of 4% only by the end of 2022. The Monetary Council has also decided to phase out non-conventional tools, such as the quantitive easing and corporate bond purchase schemes.

Rate-setters decided to raise the O/N deposit rate by 80 bps to 2.40% and the O/N and one-week collateralised loan rates by 30 bps to 4.4%, narrowing the interest rate corridor from 250 bps to 200 bps. After the rate hike, the base rate sits on the bottom of the corridor, and the one-week deposit is in the middle at 3.3%.

Policymakers said they intend to "drive expectations appropriately" by continuing to raise the base rate "at a monthly frequency and in a predictable manner", adding that changes to the central bank's one-week deposit facility will feed into the MNB's tightening cycle for a sustained period.

The current rate hike was "symbolic" as the MNB already pays 3.3% on the one-week deposit, the highest in the region. Policymakers signaled that the central bank is ready for further hikes of the one-week deposit.

The one-week deposit rate moved in tandem with the base rate from June until November, when the Council allowed the divergence of the two tools. By raising the one-week deposit rate, the MNB continues to stand ready to respond to short-term risks in financial and commodity markets quickly and flexibly, it said in the statement.

Inflation is expected to fall gradually from its peak in November in the coming months, but underlying inflationary pressures will remain strong, deputy governor Barnabas Virag said in a press briefing after the meeting.

Core inflation is expected to peak at 6% in mid-2022, reflecting the rise in commodity and energy prices, increases in freight costs, and increasingly wider supply disruptions.

Virag confirmed that the MNB is ready for a long tightening cycle and that anchoring inflation expectations will play a crucial role in mitigating second-round inflation risks and achieving price stability.

"We expect inflation to return to the tolerance band in Q4 2022 and reach the 3% target in the H1 2023", he said. 

The MNB revised its inflationary outlook to 4.7-5.1% for 2022 from the previous guidance of 3.4-3.8%. Headline inflation will be 2.5-3.5% in 2023, which is lower than projected earlier.

Hungary’s central bank was among the first to realise the risks of sustained inflation and was the first to act, he said, adding that the label used for MNB as one of the most hawkish central banks is justified.

The MNB also published preliminary data of its quarterly macroeconomic forecast on Tuesday. It revised its GDP forecast down to 6.3-6.5% from 6.5-7% in 2021 and next year’s outlook from 5-6% to 4-5%. Growth will be fuelled by domestic demand and investments, while exports are expected to rebound quickly in H2 as external markets and supply chains recover, supported by new capacities in the manufacturing sector.

Policymakers decided to close down the central bank’s non-conventional tools such as Bond Funding for Growth Scheme. Under the programme launched in mid-2019, MNB bought HUF1.5 trillion (€4.1bn) in corporate bonds to help Hungarian companies access cheap financing. The outstanding corporate bond stock of companies jumped 4-5 fold since the launch of the programme.

The Monetary Council also wound up its government securities purchase programme. Over the last 18 months, the MNB bought HUF3.6 trillion bonds. Policymakers said they will continue to closely monitor liquidity developments and are ready to intervene if necessary. 

The MNB has already phased out its subsidised lending scheme, under which it disbursed HUF3 trillion to SMEs through commercial banks at 2.5%.