Forint weakness would justify raising the monthly base rate hike back to 100 bps tomorrow

HUNGARY - In Brief 27 Jun 2022 by Istvan Racz
Just five days ago, we said in our monthly report that we expect the MNB to defend the EURHUF 400 line for a few weeks at least, to keep the pretty much unavoidable depreciation of the forint under control, with a view to moderating its pace. We also said we did not expect any increase in the pace of the monthly MNB base rate hike at tomorrow's rate setting meeting, from the 50 bps set a month ago, given that the extraordinary sterilisation rate hike in the week before last had managed to bring the forint back safely below EURHUF 400. However, conditions are changing. EURHUF is trading at 403-404 today, providing the Monetary Council with sufficient reason to seriously consider to step up stabilisation efforts again. The key means of this could be raising the pace of the base rate hike back to 100 bps again, chasing the sterilisation on its upward trajectory at an accelerated rate. We are not sure they will actually make that decision, but it appears now more likely than not. Should they stay with the 50 bps monthly pace, investors could conclude that the MNB does not really care to protect the 400 level of the forint for any time at all. For the same reason, a 50 bps sterilisation rate hike on Thursday could also be considered, although with a 50:50 chance only, we think, as the MNB normally prefers low-cost solution for its tightening problem.   

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