First Interest Rate Hike by Hungary’s Central Bank in a Decade

To curb inflation, the Central Bank of Hungary (MNB) on Tuesday raised its base rate by 30 basis points to 0.9% from 0.6% – slightly exceeding forecasts. Via this move, Hungary may be the first EU member state to initiate a cycle of rate hikes aiming to combat growing price pressures as an after-effect of the COVID-19 pandemic. Recently, Central Bank governor György Matolcsy has alluded to the possibility of interest rate hikes several times. MNB has announced that in the future it will review the need for further rate hikes every month to tackle price pressures, which are a result of the quicker-than-expected recovery from the economic crisis.

Analysts say if the measure does reduce inflation, Matolcsy can sell it as his own personal success. That’s possible within Hungary, as global oil prices are not on the rise, and the price of other raw materials like wood and steel does not look to double in the foreseeable future. If inflation does not fall, Matolcsy can still argue that he recognized the developments and reacted in time. However, the Central Bank is not interested in having a very strong forint until the end of the year, surely not above the HUF 345-355/EUR 1 rate, because a relatively weak forint brings in hefty profits. A careful balancing act is needed, observers say.

Economists warned the move is no surprise after the May 2021 inflation run well above the target 5.1%. MNB has revised its forecast of average inflation, setting it at 4.1% for this year, above its target range of 2 – 4%.

Source: Reuters