Hungarian inflation is set to climb from 7.9% in January to 8.5% in February, warned central bank deputy governor Barnabas Virag after the monthly policy meeting, where the National Bank upped the base rate by 50bp to 3.4%, in line with consensus. Policymakers continued the tightening cycle at the same pace as a month earlier.

The National Bank, which for long was the most dovish central bank in Europe, changed course in June, embarking on a monetary tightening cycle that brought the base rate from a record low of 0.6% in June to 2.4% at the end of 2021.

 The council also decided on Tuesday to raise the O/N deposit rate by 50bp to 3.40% and the O/N and one-week collateralised loan rates by 50bp to 5.40%.

Analysts were expecting headline inflation to peak at a 14-year high of 7.9% in January, as the government introduced a price cap on half a dozen food staples in mid-February.

Virag said the 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. 

Inflation remains among the lowest in the region, Virag said.

The government has also extended the fuel price cap until May 15. Households are not affected by rising energy prices, as the government has maintained a cap on utility bills since 2014. Excluding these measures, the headline data could be close to 10%, according to analysts.

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.

Virag noted that the March meeting would be a "milestone in the rate hike trajectory" when the quarterly inflation report would be released. The higher inflation trajectory could increase the chances that the central bank will accelerate the pace of rate hikes in a month's time, according to analysts.

In a statement released after the meeting, the policymakers said 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 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", according to the statement.

The council said inflation risks warrant a further tightening of monetary conditions, adding that it deems 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, which stands at 4.4%.