Europe

Hungary central bank leads EU pack with first post-COVID rate hike

4 minute read

A view of the entrance to the National Bank of Hungary building in Budapest,Hungary February 9, 2016. REUTERS/Laszlo Balogh

  • Bank raises base rate to 0.9% from 0.6%
  • Slightly exceeds analyst forecasts
  • First such increase in nearly a decade
  • Forint firms after bank confirms cycle of hikes
  • Central bank, government spar over fiscal policy

BUDAPEST, June 22 (Reuters) - The Hungarian central bank raised its base rate by 30 basis points to 0.9% on Tuesday, becoming the first in the European Union to launch a cycle of rate hikes to combat growing price pressures in the aftermath of the COVID-19 pandemic.

The National Bank of Hungary's move slightly exceeded market expectations of a 25-basis-point increase and the bank said it would review the need for more hikes on a monthly basis to tackle price pressures amid a faster-than-expected recovery from the pandemic.

"The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy," it said in a statement.

The NBH left its overnight deposit rate (HUODPO=ECI) steady at -0.05%, as expected. However, it said it would bring the interest rate on its crisis management instrument, the one-week deposit rate , into line with the base rate.

Its next review is due at a weekly tender on Thursday.

The announcements bolstered the forint to 351.15 per euro by 1417 GMT, off session lows at 356 per euro after the announcement of the rate decision, but still well off its strongest levels around 345 hit early this month in anticipation of the rate hike.

"In the Monetary Council's assessment, it is of key importance to ensure that inflation expectations are properly anchored. Upside risks to the outlook for inflation have generally increased," it said.

"Sustained rises in commodity prices and international freight costs point to a higher external inflation environment."

LITTLE CHOICE

Economists said with inflation running well above its target at 5.1% in May and pressures from the reopening of the economy mounting, the bank had little choice but act to safeguard inflation expectations, which have also crept steadily higher.

The bank now projects average inflation at 4.1% this year, above the top end of its 2% to 4% target range, returning to its 3% policy anchor sometime around mid-2022. L5N2O31TY

"With the recovery set to strengthen and inflation likely to increase further in the coming quarters, we expect additional interest rate hikes in the second half of this year," said economist Liam Peach at Capital Economics.

The bank said underlying inflation measures have also increased as the pace of Hungary's economic recovery surpassed expectations due to one of the highest vaccination rates against COVID-19 in the European Union.

The NBH, whose governor Gyorgy Matolcsy is a key ally of Prime Minister Viktor Orban, had gradually cut its benchmark base rate to support the economy in recent years, to a record low of 0.6%.

On Monday, Matolcsy stepped up criticism of an expansionary budget passed for the 2022 election year which has compounded the bank's worries over inflation.

Asked about the remarks at a conference in Warsaw, Finance Minister Mihaly Varga said it was the central bank's job to tackle inflation.

"Monetary policy has the tools in this regard to ensure that inflation becomes substantially lower. This is not up to the budget, this is an erroneous view. This is up to the ability of monetary policy to act," Varga said.

Reporting by Gergely Szakacs; Editing by Emelia Sithole-Matarise

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