Hungarian central bank hikes rates again as government caps mortgages
BUDAPEST (Reuters) – Hungary’s central bank raised interest rates again on Thursday to tackle soaring inflation, although some analysts have said that a decision by Prime Minister Viktor Orban’s government to cap rates retail mortgage interest rates could undermine its efforts.
The National Bank of Hungary (NBH) raised its one-week deposit rate by 20 basis points to 3.8% in a tender on Thursday, extending a series of weekly interest rate hikes as ‘it is trying to curb the rise in inflation.
But on Wednesday, Orban said the government would freeze retail mortgage interest rates for a six-month period starting in January to protect households from increased borrowing costs.
The bank raised its key rate by 30 basis points to 2.4% last week, its highest level since May 2014, and pledged further rate hikes next year to anchor expectations of rising inflation.
The one-week deposit rate, which the bank uses to combat short-term market volatility, is now 305 basis points above its level in June, when the bank began to tighten policy, a movement also reflected by the Budapest interbank rates.
The ceiling on mortgage rates and the scale of the rate hike, which disappointed some investors, helped push the forint down 0.3% on the day, setting it against all-time lows of 372 to one. euro reached in November.
“Prime Minister Orban’s announcements to freeze mortgage rates at their October levels until at least June could significantly undermine efforts (…) to tighten monetary conditions,” economist Orsolya Nyeste said. ‘Erste Bank in a note.
The central bank‘s press service did not respond to emailed questions about how the mortgage rate measure would affect the conduct of policy.
Hungarian inflation hit a 14-year high of 7.4% in November, above expectations, driven by higher prices for fuel, alcohol and tobacco. Prices for services increased 4.6%.
“Despite the (NBH) having now increased (the week-long rate) by 200bp in just over a month, the forint has remained virtually unchanged against the euro since the weekly hikes began, which leaves the door open for further tightening, ”Goldman Sachs economists said in a note.
Analysts polled by Reuters expect the one-week deposit rate to rise to 4.3% by the end of the second quarter, when the mortgage rate freeze is expected to expire.
Economists at brokerage firm Erste Investment said the change in mortgage rates, which follows a three-month cap on fuel prices in place since mid-November, has hurt the effectiveness of monetary policy. because borrowers would be spared higher costs.
Shares of Hungarian bank OTP, which hit their lowest level in five months on Wednesday, rebounded to trade up 3.3% to 16,115 forints ($ 49.42) at 1049 GMT, outperforming the index Budapest blue chips.
Economists at Erste said Wednesday’s declines in OTP shares were overstated in light of the possible financial impact.
($ 1 = 326.07 forints)
Reporting by Gergely Szakacs; Editing by Alison Williams and Jane Merriman