Interest rates unchanged, ending off-market sales of FX to energy importers announced today

HUNGARY - In Brief 28 Mar 2023 by Istvan Racz

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There was no surprise at today's rate-setting Monetary Council meeting: all interest rates, including the 18% sterilisation rate, the 13% base rate and the 12.5-25% interest rate corridor remained unchanged, as expected (see chart below). Yet an important change of policy was announced: the selling of FX to energy importers directly, that is off-market, by the MNB will be terminated from April 1. When introduced, these FX sales were expected to require a monthly €1.5bn of FX. In reality, the actual intervention through this method has proven to be much smaller, because of lower energy demand and falling energy prices. We estimate that the termination of this policy will affect roughly half of the initially expected monthly amount. Of course, the MNB has always declined to give more specific information on this when asked at press conferences. Going forward, the MNB's vision of this year's inflation prospects remains pretty much unchanged: they expect the headline CPI-inflation rate to decrease a bit further at the next monthly report, followed by a somewhat faster decrease in Q2 and an accelerated rate of reduction in H2. The MNB sees single-digit inflation by year end as possible but also hard to achieve. The Bank prepared an historic review of the experience from 204 countries over the past 52 years, to find that reducing above-20% inflation rates to below 10% took an average two to two-and-a-half years period. At today's press conference, vice governor Virág appeared to use this study to give the impression that the Bank's mandate to achieve this result within a single year will be a very tough job, requiring a major effort. Consequently, no early rate cuts should b...