Analysts expect a base rate increase from tomorrow's Monetary Council meeting

HUNGARY - In Brief 24 Jan 2022 by Istvan Racz

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The monthly rate-setting meeting is due tomorrow. Importantly, the 1-week deposit rate (= the effective sterilisation rate) will not be a subject for decision, as that one is set at the weekly depo tenders on Thursday's. So what is at stake for the upcoming meeting is three things: (a) the base rate, which is largely symbolic now, but is still an indicator of the Council's longer-term intentions; (b) the interest rate corridor, an indicator of how serious the Council is about further increases in the 1-week depo rate in short term; (c) any other policies or indications.For the base rate, analysts expect +30bps, to 2.7% (Portfolio.hu poll). We agree, as the MNB will need to demonstrate the continuity of its tightening course, especially after keeping the depo rate unchanged so far in January. We also expect a corresponding adjustment of the interest rate corridor, by +30bps, to 2.7-4.7%. Importantly, the EURHUF rate has started to climb slowly back towards the 360 line, and the sharpening conflict around Ukraine is also a warning signal that there needs to be space secured for further deposit rate hikes if that becomes necessary because of potential market tensions. Regarding other policies, not a lot can be done now that QE was essentially closed down last month. Instead, the Council's statement is likely to reassure the market that the tightening course is still on, and the MNB remains watchful, flexible and committed.In the same poll, analysts' median expectation for the peak level of the 1-week depo rate in the current cycle is 4.8%. We expect 5% for end-2022, which is also our peak rate forecast. From there, we expect the deposit rate to shrink moderately, to an en...