The central bank will have to raise the key rate further in the near future if it is to reach the inflation target of around 3% from previous years, especially in view of the expansionary budget voted for the 2022 election year.
After nearly a decade, the National Bank of Hungary (NBH) decided on Tuesday to raise the central bank’s key rate by 30 basis points, from 0.60 to 0.90%.
National Bank raises its base rate for the first time in a decade
The Monetary Council of the National Bank of Hungary (NBH) decided to raise the central bank’s policy rate by 30bp to 0.90% at a monthly policy meeting on Tuesday. Central bank policymakers previously signaled a possible rate hike at the June monthly policy meeting amid soaring inflation. BNB […]continue reading
Even though the last time the NBH raised the benchmark rate in December 2011, the move came as no surprise, as NBH leaders have been trying for weeks to do everything they can to clarify their intentions. Deputy central bank governor Barnabás Virág announced the interest rate hike to Reuters in May, and a month later, just minutes after the release of May inflation data, he spoke about ” proactively adjust short-term rates to cope with rising inflation risks. This was confirmed by central bank governor György Matolcsy at a conference the same day.
The move was necessary because the inflation rate in Hungary has risen sharply in recent months, with the country having the biggest price increase in the EU in April.
Although the central bank has consistently stressed in recent years that it does not have a specific exchange rate target, according to its own forecast, annual inflation will remain above 4% on a consistent basis. Obviously, this posed a significant threat to exchange rate stability, forcing the BNH to act.
Meanwhile, the Hungarian economy appears to be recovering rapidly and has suffered little from the economic crisis triggered by the pandemic.
Despite the positive economic figures, the government is constantly trying to stimulate the economy as the 2021 and 2022 budgets are expansionary, providing for high deficit targets and a high level of public spending.
Due to the government’s lax fiscal policy in an attempt to revive the economy, the central bank governor has even repeatedly expressed concern over the deficit target in the 2022 budget, warning policymakers that spending should be reduced, while annual deficit and debt reductions should also be reduced. substantially.
A few days ago, Matolcsy even went so far as to consider the deficit target of 5.9% of GDP in the 2022 budget “an error” which unnecessarily creates a significant risk in the functioning of the Hungarian economy.
Central bank director warns overspending in 2022 could fuel inflation
The Governor of the National Bank of Hungary (NBH), György Matolcsy, said he believed the deficit target of 5.9% of GDP in the 2022 budget was “a mistake” and could prepare the country for ” persistent high inflation “in a column published on the site of the daily Magyar Nemzet on Monday. “Parliament approved the 2022 budget and its target of […]continue reading
Due to government stimulus decisions and already high inflation, the price of goods and services will also continue to rise.
The MNB previously set an inflation target of 3%, which it now considers achievable by 2022 at the earliest. In particular, according to the latest inflation report, although the inflation rate stagnated at 5.1% in May, the tax-adjusted core inflation indicator rose to 3.4% from 3 , 1% in April.
What is certain is that the current hike in key rates will not significantly reduce inflation, so we can expect further central bank intervention in the near future. The overwhelming majority of experts agree and expect further key rate hikes in the coming months. According to Zoltán Török, an expert at Raiffeisen bank, the base rate will easily reach 1.2% by the end of the year, double the current level.
Senior Takarékbank analyst Gergely Suppan also estimates that we can expect a base rate of 1.25% by the end of the year and 1.50% from March of l ‘next year.
Following the rise in interest rates, the forint also started to strengthen on Wednesday, and the trend is expected to continue, which could lead to some easing in the prices of goods imported from abroad.