Surprise, surprise: the MNB announced the end of the interest rate hikes, following a 125 bps rate increase today

HUNGARY - In Brief 27 Sep 2022 by Istvan Racz

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Well, this was truly surprising. We wrote about the prospects and analyst expectations yesterday. From that note, it is probably clear that analysts' median view was significantly different from what actually happened. But for a fact, the MNB raised the base rate and all other rates by a uniform 125 bps today. The base rate went to 13%, and the interest rate corridor rose to 12.5-15.5% as a result. At a brief press conference after the Monetary Council's regular monthly rate-setting meeting, governor Matolcsy announced the immediate end of the Bank's series of base rate increases. The latter decision was explained by the MNB's new inflation forecast. Even though the Bank expects inflation to rise further in the coming months and to peak around 20% in early 2023, but it also expects it to decrease from that level to below 10% in H2 2023 and to return to the Bank's target level (2-4%) in H1 2024. This means that the MNB sees the real interest rate associated with the base rate as being positive in a forward-looking perspective. However, the Bank's speakers (Mr. Matolcsy and Mr. Virág) stressed that despite no more rate hikes from now on, 'monetary tightening will continue'. By this, they meant the fact that the introduction of their new sterilisation instruments will take place starting October. They expect the stock of liquidity sterilised in the existing 1-week deposit facility to shrink to less than half as a result, and continued to present this change as a major reduction of the stock of liquidity in the banking sector, concluding that this shift would amount to a further tightening of policy. We have the following problems with today's decisions, at first glance: 1...