Hungary's cenbank shocks with 185 bps rate rise after forint plunge, pledges more

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  • NBH raises base rate by 185 bps to 7.75%
  • Biggest hike since start of global financial crisis
  • Most economists had expected a 50 bps increase
  • Plunging forint, rising inflation prompted bigger move
  • Cbank raises 2022, 2023 inflation forecasts

BUDAPEST, June 28 (Reuters) - The National Bank of Hungary (NBH) raised its base rate by a whopping 185 basis points to 7.75% (HUINT=ECI) on Tuesday, ramping up the pace of hikes after the forint plunged to a record low this week, while inflation keeps surging.

"The most important task is to fend off second-round inflation impacts and anchor expectations," deputy Governor Barnabas Virag told a news conference after the decision, which no one in a Reuters poll last week had expected.

He said the continued rise in inflation and persistent inflation risks warranted a decisive continuation of the Hungarian central bank's tightening cycle, which started in June 2021, the first in the European Union.

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"Inflation risks point upwards," Virag said. The bank raised its 2022 inflation forecast to 11-12.6% from 7.5-9.8%, and also raised its 2023 projection even though the government has put in place price caps on fuels, basic foodstuffs and households' energy bills.

The bank also said that "due to the increased challenges, the Monetary Council considers it necessary to close the gap between the base rate and the one-week deposit rate."

Virag said the one-week rate would rise to 7.75% from 7.25% on Thursday, adding the bank needed "every percentage point and basis point" to reach its 3% inflation target, which is expected to happen in 2024.

At 1320 GMT, the forint , central Europe's worst-performing currency, which sank to a new low at 404.5 versus the euro on Monday, traded at 398.25 per euro, stronger than 400 just before the announcement but off earlier highs. read more

The median forecast in a Reuters poll last week projected a 50 bps increase in the base rate to 6.4%, with three economists forecasting a 100 bps move.

Tuesday's hike was the NBH's single-largest base rate increase since a 300 bps emergency move at the start of the global financial crisis in October 2008, taking the NBH into its steepest tightening cycle in nearly three decades.

"The decision by Hungary's central bank (NBH) to raise its base rate by a much larger-than-expected 185bp today, to 7.75%, demonstrates that the NBH has now become much more concerned about rising inflation and the weakness in the forint," said Joseph Marlow at Capital Economics.

"We think further hikes are likely, taking rates to at least 9% in the coming months."

The forint is still down some 7% against the euro this year alone despite the NBH now having raised its base rate by 715 bps over the past year, pressured by a high budget deficit, windfall taxes on companies and a funding row with the European Union. read more

The bank also said that from July it will extend the use of its swap facility, which provides foreign exchange liquidity, and will stand ready to use it more actively to enhance the effectiveness of monetary policy transmission.

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Reporting by Gergely Szakacs and Krisztina Than; Editing by Alison Williams, William Maclean

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