Full Percentage Point Hike of National Bank of Hungary’s Base Rate Exceeds Expectations
March 22, 2022
According to a statement released today by Hungary’s Monetary Policy Council,
The outbreak of the Russia-Ukraine war has led to a further increase in upside risks to inflation: continued rises in commodity and energy prices point to a persistently high external inflation environment. In addition, elevated inflation may persist for longer as a domestic inflationary effect if strong price dynamics are built into economic agents’ expectations, resulting in second-round inflationary effects.
Mitigating increased fundamental inflation risks and driving expectations appropriately have necessitated the continuation of the tightening of monetary conditions, and the base rate tightening cycle by a larger increment than before. The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilizes around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy.
Officials at the National Bank of Hungary had already lowered their key interest rate extensively when the pandemic struck, and only two 15-basis point cuts in June and July 2020 brought the rate to a record and effective low of 0.60%, where it remained for a whole year. The current cycle of increases commenced in July 2021 with three straight 30-basis point monthly rate hikes to 1.50%. Given the prevailing view around the world last summer that inflation was about to crest, the size of the hikes in September and October were halved to 15 basis points each in September and October, but increases of 30 bps per month resumed in November and then increased further to 50 basis points in each of the first two months of this year.
Analysts had anticipated another rise in incremental changes this month but not quite as much as the full percentage point hike from 3.4% to 4.4%. Inflation in Hungary has meanwhile accelerated from a pandemic low of 2.2% in May 2020 to 3.1% in February 2021 and 8.3%, the highest since August 2007, in February of this year. Core CPI of 8.1% is almost as high currently as total inflation, which bank officials believe could flirt with double-digit territory later this year. A return to the 2-4% inflation target will take time even if things develop favorably. For now, inflation risks are currently skewed to the upside. Economic growth of 7.1% last year had plenty of momentum when 2022 began, but Hungary’s location in Eastern Europe puts the country possibly in Putin’s cross-hairs if his ambitious grab for territory cannot be deterred. Hungary may be lucky to achieve half the GDP growth this year that it had in 2021, but the top economic priority will be containing inflation and assuring financial market stability.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: National Bank of Hungary
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