O/N repo rate down to 20.5% at today's rate-setting meeting

HUNGARY - In Brief 25 Apr 2023 by Istvan Racz

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The Monetary Council reduced the O/N repo rate, the ceiling of the MNB's interest rate corridor, from 25% to 20.5% today, maintaining some scope for a potential upward adjustment of the 18% sterilisation rate, in case of a necessity to do so. This fell quite close to analyst expectation, which was a reduction of the repo rate to 20%. The Council also stated that maintaining the 18% O/N deposit rate is well justified for the time being. The Council said that Hungary's risk assessment has improved lately, and the probability of extreme risk scenarios have decreased, which has made possible to move forward with a 'normalisation procedure'. Today's step is a part of the latter. The Council's approach also explains the exact new level of the repo rate: before the emergency measures of October 14, the repo rate was by 250bps above the sterilisation rate of those times, and this relationship between the two rates have been restored exactly by today's decision. Although the sterilisation rate, currently the O/N deposit rate, is determined by the MNB management on a daily basis, its setting will be primarily the subject of future monthly rate-setting meetings of the Council. Decision making will follow the principles of caution, gradually, market-based regular reassessment and proper prior communication, said vice governor Virág at his usual press conference after today's meeting. He also said that based on WEAI estimates, it appears that activity slowed further in Q1, deepening to some extent the technical recession seen already in H2 last year. The MNB still believes that the recovery of GDP may start from the middle of the year, in line with the expected acceleration of CPI-...