The MNB started to reduce the O/N deposit rate with a 100 bps first step today

HUNGARY - In Brief 23 May 2023 by Istvan Racz

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The Monetary Council's decision was to reduce the sterilisation rate, which is the O/N deposit rate, by 100 bps to 17%, after keeping it unchanged at 18% since October 14 last year. The repo rate, which is the ceiling for the MNB's interest rate corridor, was reduced accordingly, by 100 bps to 19.5%. Following the decision, governor Matolcsy spoke, which is a rare event, normally occurring only when measures of key importance are taken by the Monetary Council. What he said can be summarised as follows: The MNB did everything right and at the right time. Although Hungary's CPI-inflation rate is by far the highest in the EU, this was due to specific local factors as very loose fiscal policy, the negative impact of administrative price caps, and the lack of appropriate measures to increase productivity. So, essentially the government was responsible for all the bad things. However, there is hope for improvement now, as the government seems to have realised the severity of the task, especially by aiming at a fiscal deficit of less than 3% of GDP for 2024. Given improvements of external and domestic conditions alike, the MNB can now reduce the sterilisation rate, which is responsible for protecting financial stability, but reducing the (13%) base rate, whose role is to overcome inflation (!), remains out of the question for a long while. In managing further disinflation, close cooperation will be required between the Bank and the government at all times. The government should get rid of administrative price caps as soon as possible, Mr. Matolcsy said. He did not mention extraordinary taxes, which also have an inflationary impact. Following the governor's words, deputy gover...