Hungary Watch: MNB pledged more bold hikes after July tightening

The National Bank of Hungary (MNB) raised the key interest rate by 30 bp on Tuesday, sending a strong message to market participants that they are serious about tightening, in order to avoid unwanted inflationary risks. From now on the base rate is 1.20%, the overnight deposit rate is 0.25% and the overnight lending rate is 2.15%. With a hawkish statement, a further hike by 30bp is set to follow in August, and the size of another hike in September depends on the inflation report.

The MNB decision to hike the key rate by 30bp did not come as a big surprise, as the market expectations stood around 15 to 30bp. Hence, the decision, even though it exceeded the consensus, provoked only minor currency appreciation. The EUR/HUF dropped from 361 to 359 but could not stay there during the press conference. In addition to the rate hike cycle, central bankers have also decided to stop lending tenders, but repeated that the quantitative easing program will remain a key policy tool in the future as well.

The Monetary Council highlighted again that it’s extremely important to ensure that inflation expectations are properly anchored. Commodity price inflation, as well as possible second-round inflationary effects during the economic recovery pose the greatest risks to inflation in Hungary. In June, on the back aforementioned factors, headline inflation already reached 5.3% — above 5% for the third month in a row — significantly exceeding the 3+/-1% tolerance band. The central bank continues to emphasise that even with the necessary adjustment, inflation can only return to the target sustainably by mid-2022. Meanwhile, the HUF does not seem to stabilise at stronger levels either, which poses a significant risk through the import of durable goods. This may be one of the reasons why a strong signal from decision-makers, embodied in the content of the July decision, may have been needed.

Looking ahead, the big question now is how long the adjustment cycle will continue at this more aggressive pace we can expect to return to the coming month based on today’s decision. It’s been indicated several times that the extent of the July rate hike will be decisive for the future, so now on the market has just started pricing in a similar step for August and for September, meaning that the key rate may end up at somewhere between 1.50% to 1.80%. In our opinion, at such a fast pace the regulator may gain enough room until September, the next time they are going to evaluate the inflation outlook, meaning that it is likely that two more 30 bp interest rate hikes may be enough to stabilise the inflation path. Looking at the interbank market pricing, forward rate agreements are indicating similar levels by end Q3 and Q4.

As for our forecast, we had previously estimated the end of the adjustment steps at 1.20%, which we timed for the end of Q3, although we did not rule out that the base rate could even go higher. In contrast, the central bank is taking much harsher actions to keep inflation under control, resulting in an even higher interest rate environment by the end of 2021 than we previously anticipated. This is why we are now revising our interest rate forecasts while keeping our 350 EUR/HUF Q4 call unchanged.