The Monetary Council of the Hungarian National Bank raised the central bank base rate by 100bp to 4.40% at a monthly policy meeting on March 22. The rate rise, the steepest in years, was double the scale of the one at the policy meeting a month earlier, but in line with forecasts.
Since June 2021, the MNB has raised the base rate by 380bp. The one-week deposit, which has become the effective monetary policy tool, has risen from 0.6% to 6.4% in the same period.
Policymakers also upped the O/N deposit rate by 100bp to 4.40% and the O/N and one-week collateralised loan rates by 100bp to 7.40%.
The O/N deposit rate and the collateralised loan rate mark the bottom and the top, respectively, of the central bank's "interest rate corridor".
In a statement released after the meeting, rate setters said strong negative supply effects are likely to raise inflation in the coming quarter, while higher energy and commodity prices boost inflation further on the expenditure side.
The short-term path of inflation will depend on the duration of the war, the extent and persistence of sanctions, as well as government responses.
Hungary’s economic fundamentals were strong before the war, and preliminary data from the first two months foreshadowed a growth of 6%, MNB Deputy Governor Barnabas Virag said after the meeting.
Virag emphasised the importance of the need for the MNB to achieve price stability, which was in line with previous comments. He forecast that negative interest rates will be the smallest in Hungary when the tightening cycle ends.
Due to the effects of the war and sanctions, the central bank also downgraded the economic growth outlook to 2.5-4.5% from 5.1% in 2022, "depending on the duration of the war and the policy of sanctions".
In the update of its inflationary outlook, the central bank raised its average annual inflation forecast for 2022 to 7.5-9.8%, but said the CPI is expected to return to the +/-1pp tolerance band around the mid-term 3.0% target in the H2 of 2023 and reach the target in the H1 of 2024 on the back of "the fading of the first-round effects of the war and the sanctions, the decrease in external inflationary effects" and "the central bank's proactive measures".
Analysts expect the MNB to continue its hawkish stand to fight inflation. Takarekbank forecasts the base rate to reach 7% by mid-year.
Capital Economics expects the MNB to “gradually” close the gap between the base rate and the one-week deposit rate in the coming months. The central bank could raise the base rate to rise by another 100bp at the upcoming meetings, which will come after the April 3 elections. The base rate and short-term interbank interest rates could rise to 8% by the end of 2022.
The EUR/HUF eased from 373 to 371 after the decision.
Details of the quarterly inflation report will be published on Thursday.