The MNB is to slow down the pace of base rate hikes from now on

HUNGARY - In Brief 24 May 2022 by Istvan Racz

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Exactly one-week ahead of the monthly rate-setting meeting, MNB vice governor Virág spoke in an interview today. He said the MNB will be unable to fully counteract the domestic impact of global inflationary pressures. He repeated governor Matolcsy's message, sent out a week ago, according to which a two-week structural reform program is needed, to give a boost to competitiveness and to correct the three imbalances currently present in the domestic economy, meaning inflation, the fiscal deficit and the current account's imbalance. We would rather not comment on the MNB's structural reform plan, as that appears to us more of a political message than a set of professionally consistent measures, in addition to the fact that it is in many respect the repetition of what the Bank had said on the subject several times before. Instead, we would focus on Mr. Virág's statement that the MNB is likely to halve the pace of its monthly base rate increases from now on. The latter, if approved by the Monetary Council, which is pretty much guaranteed, would mean a 50 bps increase of the base rate, to 5.9%, next Tuesday. Importantly, he did not say anything about the sterilisation rate, the one-week deposit rate, currently at 6.45%. This means that what he said cannot be interpreted as a scaling back of the MNB's tightening efforts. Before and after this statement, we equally expected and continue to expect an additional 30 bps increase in the 1-week rate next Thursday, the only one for a month if no major turmoil occurs on global markets in the meantime. Slowing down base rate hikes makes sense. Raising the base rate by another 100 bps next Tuesday would be the last such measure anyway ...