The MNB has just raised the sterilisation rate to 0.75%, to preempt increasing inflationary pressures

HUNGARY - In Brief 24 Sep 2020 by Istvan Racz

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The MNB has called its usual 1-week deposit tender with a fix 0.75% interest rate today, deviating from the unchanged 0.6% base rate and from its practice used so far, according to which the 1-week rate, which is the effective sterilisation rate, was always the same as the base rate. Later, the MNB told Reuters in response to a question coming from the news agency that the purpose of the move was to prevent the further intensification of inflation risks. This appears to mean that the immediate purpose was to support the forint.It was just two days ago that vice governor Virág called the attention to the distinction between the base rate and the sterilisation rate once again. The base rate is set by the Monetary Council, whereas the 1-week rate is set by the MNB's management, and as Mr. Virág stressed on Tuesday, the MNB was going to determine the 1-week rate on a weekly basis in the forthcoming period. It did not take a very long time before this statement becoming practically important.In our view, the distinction between the two rates may serve at least two basic purposes: one is to leave the base rate for politics, meaning that the MNB can raise the interest rate that matters for the HUF money market without being exposed to political attacks that they are tightening in the face of weak economic conditions, because the base rate remains unchanged, and any specific level of the 1-week rate holds only for one occasion. The other one is to make rate decisions more flexible, providing for opportunities to change policies tactically, to fine-tune instruments as required by momentary market conditions.The result of today's 1-week deposit tender is expected at 15:00, i.e. ...