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Hungary Raises Rates Again, Signals More Tightening

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Hungary’s central bank raised its interest rates further in April and signaled that the tightening cycle would continue as inflation is expected to remain high amid the supply shock caused by the war in Ukraine.
The Monetary Policy Council raised the base rate by 100 basis points to 5.40 percent, the Magyar Nemzeti Bank said Tuesday. The hike was in line with economists’ expectations.

The overnight deposit and lending rates were also raised by 100 basis points each to 5.40 percent and 8.40 percent, respectively.

The central bank has raised the key interest rate in every policy session since June last year.

“Mitigating increased fundamental inflation risks and driving expectations appropriately make it necessary to continue the base rate tightening cycle in the coming period,” the bank said in a statement.
Policymakers expect the base rate to gradually catch up to the level of the one-week deposit rate evolving in the coming months.
They assessed that maintaining tighter monetary conditions for a longer period is warranted to manage increasing second-round inflation risks resulting from persistently negative supply effects, the bank said.
The bank said policymakers stand ready to use every tool available, if necessary, to maintain market stability.
“The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy,” the MNB said.

The Russia-Ukraine war has posed a much higher risk than usual to the outlook for inflation, the bank said. Headline inflation hit a 14-year high of 8.5 percent in March.
Inflation is forecast to climb further in the second quarter, due to strong negative supply effects in the backdrop of the war. Core inflation is also expected to rise further in the coming months.
That said, inflation is expected to return to the central bank tolerance band in the second half of 2023, before reaching the central bank target of 3 percent in the first half of 2024, as the the first-round effects of the war and the sanctions fade and external inflationary effects decrease, underpinned by steps taken by the central bank.
The consumer price inflation is expected to be 3.3-5.0 percent in 2023, before falling in line with the inflation target from 2024, the MNB added.

GDP growth is now forecast to be slower rate than expected, at 2.5-4.5 percent in 2022, and 4.0-5.0 percent in 2023. Economic expansion is expected to slow further to 3.0-4.0 percent in 2024.

Capital Economics expect the MNB to raise the base rate to 8.20 percent by the end of this year.
“Spillovers from the war in Ukraine are likely to push headline inflation beyond 10 percent this year, and we think that this will ensure that the MNB continues to hike aggressively over the next few months,” Joseph Marlow, an economist at the research firm, said.

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