Just as expected: the base rate and the interest rate corridor rose by 200bps today

HUNGARY - In Brief 12 Jul 2022 by Istvan Racz

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Today's non-rate-setting Monetary Council meeting, which is regularly held once a month, was turned into a rate-setting event, as expected on the basis of hints from the MNB given last week. The base rate went up to 9.75%, the same as the 1-week depo rate, and the interest rate corridor rose to 9.25-12.25%. Following the meeting, vice governor Virág held one of his usual online 'background discussions'. He said that at this moment, it is of secondary importance what exactly makes inflation (supply or demand). The key thing is to raise the base rate quickly to the new level of the deposit rate, in case the latter needs to be raised on an extraordinary basis. The purpose of this early harmonisation of the two rates is to get the new (higher) level to become part of expectations in full, with a view to halt second-round inflation effects, which tend to be very significant. In the foreseeable future, the Bank intends to follow this practice. A reverse FX swap tender was also held today. The Bank intends to continue this series by holding reverse FX tenders on a daily basis. At today's tender, the MNB was standing ready to accept up to €5bn of bids from banks for O/N reverse swap contracts, the same amount as the one used on the previous two occasions. Actual demand fell to €925m, and all bids were accepted, Mr. Virág said that initial results were encouraging, as swap rates rose to a level in line with the MNB's momentary preference, i.e. within the Bank's interest rate corridor. Mr. Virág stressed three times during the event that the MNB is ready to use all tools at it disposal to halt second-round inflation effects.