The MNB appeared to really mean it today

HUNGARY - In Brief 24 Aug 2021 by Istvan Racz

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The MNB made two important decisions at their August rate-setting meeting today, both in the direction of significant tightening:- They raised the base rate by another 30 bps to 1.5%, the same way as they also raised the interest rate corridor by the same amount, to 0.55-2.45%, and as they will raise the 1-week deposit rate to the same level as the new base rate at the next tender due later this week, according to vice governor Virág's comments made after the meeting; and- they announced a gradual reduction, with a view to the eventual elimination, of the Bank's direct purchases of government bonds, starting with a cut of weekly purchases from HUF60bn to HUF50bn from this week.Regarding the rate hike, it was higher than our forecast of 15bps, but we were apparently at the 'dovish end' of expectations on the market, as most analysts expected the Bank to maintain the same speed of rate increases as in the previous two months, the way it actually happened. Explaining the decision, a key remark by Mr. Virág was that no one should overestimate the drop by the yoy headline inflation rate in July, as that was mainly a consequence of extreme big base effects, rather than the sign of decreasing inflationary pressure. No surprise on this front either, as analysts including us, were essentially all of the same view.The real novelty today was the announcement on bond purchases. This was a bit tricky, as the MNB actually bought only HUF53bn per week over the last fortnight, and the last time they bought no less than HUF60bn a week was in mid-June. So coming down from the actual level to HUF50bn per week should not be seen as a big step. In addition, they stressed once again flexibi...