Sterilisation rate fell by 100 bps to 14% today, just as expected

HUNGARY - In Brief 29 Aug 2023 by Istvan Racz

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The Monetary Council acted in line with widespread expectation today. The O/N deposit rate and the repo rate were reduced by the same amount, the latter to 16.5%, whereas the base rate and the interest rate on the non-auction O/N deposit facility - the lower end of the interest rate corridor - were left unchanged at 13% and 12.5%, respectively. Speaking after the meeting, vice governor Virág maintained the optimistic view on inflation that was reflected by the Q2 inflation report in late June. He said that prices actually fell in 35% of the CPI-basket in July. The only domestic factor that he mentioned as worrisome was the services sector, in which disinflation started later than elsewhere and is proceeding more slowly. Given these circumstances, currently available information suggests, according to Mr. Virág, that September may bring about to another 100 bps reduction of the sterilisation rate, which would mean its reunification with the base rate. At that point, a simplification of the system of policy instruments will take place, although, as he said, discount bonds and reverse FX swaps will be kept in operation. (This largely means that the 'simplification' will most likely affect the O/N deposit auctions, we would add here speculatively.) However, Mr. Virág stressed repeatedly that the global environment is rather hectic, and the general investment sentiment actually deteriorated in July. China, the war, monetary policies, commodity prices, etc. may all change quickly. As a result, MNB monetary policy cannot be operated in an 'autopilot' mode. The situation will have to be fully reassessed before each decision, in a data-driven way. The first step of this series ...