U.S. Markets

Hungarian central bank to leave rates steady as inflation creeps higher

BUDAPEST (Reuters) - The National Bank of Hungary is likely to leave interest rates unchanged next Tuesday after a recent increase in closely watched inflation measures and continued volatility in prices and financial markets.

All 19 economists in a Feb. 15-17 Reuters poll said the NBH would leave its base rate steady at 0.6% next week. The nine analysts who gave a forecast for the overnight deposit rate also said it would stay at -0.05%.

Most economists also expect the NBH to leave its one-week deposit rate unchanged at 0.75% at least until the end of the first quarter. It raised the rate 15 basis points in September after a rise in inflation and greater risk aversion caused by the second wave of coronavirus.

The Hungarian central bank’s favoured inflation gauge rose to 3.5% in January and the official core inflation rate jumped to 4.2%, above market forecasts and overshooting the bank’s 2% to 4% target range.

“Going forward, we expect relatively benign underlying inflation dynamics, but administrative price changes and sharp base effects in energy inflation in the first half of 2021 point to elevated headline inflation volatility in the near term,” economists at Goldman Sachs said in a note.

“Set against this, we think that the (NBH) will remain cautious and keep the gap between the 1-week deposit rate (currently +0.75%) and the base rate (+0.60%) for the time being.”

Deputy Governor Barnabas Virag said last month that the NBH should stick to its cautious monetary policy stance because of an expected short-term rise in inflation and volatility in risk appetite.

Analysts expect the Hungarian economy to grow by 4.5% both this year and next after last year’s pandemic-driven recession, which was somewhat milder than initially feared because of a stronger-than-expected recovery in the fourth quarter.

However, any reopening of the economy remains a distant prospect for now, because of a slow pace of vaccinations and a renewed increase in coronavirus infections.

“We believe that there won’t be a change in the one-week deposit rate this month,” said economist Peter Virovacz at ING.

“Things will be getting trickier rather in the second quarter of 2021 with inflation spiking and jumping above the target range in April-May. That means that the NBH doesn’t need to fine-tune the rates in 1Q21, but may need to adjust in 2Q21.”

Reporting by Gergely Szakacs, editing by Larry King