The building of the NBH in Budapest – Photo: wikimedia

Central bank keeps base rate on hold

Hungarian central bank policymakers kept the base rate on hold at 13 percent at a regular rate-setting meeting on Tuesday, while further narrowing the upper band of the interest rate corridor by 100 basis points to 18.5 percent.

In a statement released after the meeting, the Council said it was also warranted to cut the interest rate on the central bank’s one-day quick deposits offered at daily tenders by 100 basis points.

The Council had cut the rate on the deposits by 100bp at the policy meeting in May, too.

In its statement, the Council said it was necessary to “maintain tight monetary conditions in order to achieve price stability”, adding that the current level of the base rate was “adequate to manage fundamental inflation risks”.

“The [NBH] is constantly assessing the effects of international financial market developments on the domestic risk environment, incoming macroeconomic data and developments in the outlook for inflation. If the improvement in risk perceptions persists, the central bank will continue the gradual convergence of the interest rate conditions of one-day tenders to the base rate,” the Council said.

At a press conference after the meeting, central bank deputy-governor Barnabas Virag said the “normalisation phase” of monetary policy started in May, with the 100bp reduction of the quick deposit rate, “is continuing”. The NBH is applying a “cautious and gradual” approach to the quick deposit rate, he added. Virag acknowledged an improvement in Hungary’s risk assessment, but said the external market environment “remains volatile”. He also pointed to the continuation of a “trend-like” improvement in Hungary’s external balance. Inflation is expected to fall “tangibly” under 10 percent by the end of 2023, he said. The bank’s projection for 2024 inflation was raised to 3.5-5.5 percent from 3.0-5.0pc because of the impact of tax measures, he added.

Virag said a pickup in economic growth could start with a “significant reduction” in inflation from the second quarter of 2023.

The situation on Hungary’s money market is “stable” and government securities yields have fallen, the deputy-governor said. The war in Ukraine and developments on energy markets remain “the biggest risk factors”, he added.

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