Inflation risks persist, tightening slows
The rate hikes introduced by the Monetary Board of the National Bank of Hungary (MNB) this summer continued, but surprisingly, the central bank decided on September 21 to only tighten them by 15 basis points. Immediately after the announcement, the forint started to weaken as the market consensus was in favor of a 25 basis point increase.
At its last rate-setting meeting, the Monetary Council decided to raise the base rate and the interest rate corridor by 15 basis points, further reduce the weekly government bond purchase rate and eliminate the forint liquidity swap facility.
The base rate has thus increased to 1.65%, the rate for overnight bank deposits to 0.7%, and the interest rate for guaranteed overnight loans and guaranteed one-week loans to 2 , 6%.
Inflation will remain persistently high, above 5%, and will not return to the range set by the MNB until next year, Barnabás Virág, deputy central bank governor, said in a briefing. press conference held after the Monetary Council meeting.
The deputy governor said the MNB will continue the cycle of interest rate hikes until inflation is sustainably close to the 3% target, possibly by the second half of the year. next year. Previously, the MNB expected inflation to return to the target range by mid-2022; inflation risks are still on the rise.
Meanwhile, the recovery of the Hungarian economy continues at a steady pace, with gross domestic product reaching its pre-pandemic level. GDP growth this year is forecast at 6.5%, and economists say that a growth rate of between 5 and 6% could be realistic in 2022.
However, inflation surged over the summer, with the current outlook expected to rise again, to over 5%, and a further spike in inflation is expected to take place before the end of the year in the months. around 5.5 to 6%.
Core inflation is also on the rise: it could reach 4% in the coming months. The rebound in the economy led to a sudden rise in prices in the service sector. For industrial goods, rising production costs are putting upward pressure on prices, analysts said.
Monetary tightening will continue in the near future. Based on this most recent Monetary Council decision, the base rate and the interest rate corridor will increase in increments of 15 basis points and, according to Barnabás Virág, this will continue to prevail in the months to come.
Besides raising interest rates, the central bank made two other important announcements. The swap facility providing liquidity in forint will be phased out and monthly purchases under the government securities purchase program will decline again, this time from HUF 50 billion to HUF 40 billion. The board will make decisions on further purchases in December.
The last paragraph of the central bank’s announcement after the rate-setting meeting indicates that the cycle of interest rate hikes may continue in small increments. That could mean the base rate would be 2.1% by the end of the year, Equilor analysts commented on the move. According to them, average annual inflation is expected to reach 4.3% this year and fall to 3.3% next year.
Also commenting on the decision, Gábor Regős, head of macroeconomic activities at the Századvég Zrt research institute, said the central bank’s decision was ambivalent: while the rate hike was lower than many had expected, the The phasing out of the swap facility providing liquidity in forint was unexpected. .
Overall, the immediate market reaction to the decision saw a weakening of the forint, which can be explained by the lower rise in interest rates, with the other two tightening measures not yet known at this time- the.
An important message to the market is that there will be further monthly tightening, based on which we expect interest rates to rise by 15 basis points also in the coming months, Regős said. This could help stabilize the forint exchange rate and reassure the market, he added.
According to Gergely Suppan, senior analyst at Takarékbank, inflation could fall rapidly early next year due to base effects. However, a probable and significant increase in the minimum wage, the reimbursement of personal income tax, the six-month bonus for law enforcement officers, the retirement bonus to be paid this year and the pension month 13, will collectively increase household income by about HUF 1 trillion-1.1 tln.
This could give a significant boost to consumption and economic growth, but also inflation, the analyst warned.
Figures to watch in the coming weeks
Labor market statistics for August will be released on September 28. The Central Statistical Office (KSH) will publish the balance of the general government sector on October 1, referring to the second quarter of 2021. Industry and retail figures for the month of August will be released on October 6 .
This article first appeared in the print issue of the Budapest Business Journal on September 24, 2021.