Start of tightening course confirmed at today's Monetary Council

HUNGARY - In Brief 25 May 2021 by Istvan Racz

Interest rates were not touched at the Monetary Council's monthly rate-setting meeting today, May 25. However, the statement confirmed most of what vice governor Virág said about a week ago, though expressed this time in the more indirect and enigmatic language typically used by high-level decision makers.In essence, the Council sees all sorts of inflation risks generally increasing, including the prices of energy and transportation, strengthening domestic demand in the wake of reopening measures, potential labor market bottlenecks for the same reason, global risk aversion towards emerging markets, etc. For this reason, the MNB is standing ready to proactively tighten monetary conditions. But the decisive input for how to proceed with tightening will be the Q2 inflation report, to be discussed by the Council on June 22.The MNB is maintaining the system of weekly tenders for 1-week deposits and is going to maintain a difference between the base rate and the 1-week depo rate as long as they feel necessary. (This refers more to the different mechanism used for setting the 1-week rate than the actual relation between the two rates, in our view.) The Council keeps speaking positively about the program to buy government bonds, whereas NHP (the refinancing scheme for bank loans to SMEs) and the corporate bond purchasing program are mentioned in a less enthusiastic style than so far, as policies where the MNB needs to assess the optimal size and structure of action constantly.All this is no surprise at all after Mr. Virág's recent indication of the new party line. No one expected any concrete measure for today, the real question of the day being how much the Council would actu...

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