Hungary’s central bank raised its key interest rate massively on Tuesday and signaled more hikes as policymakers try to support the weakening forint and curb further acceleration in inflation.
The Monetary Council, led by Governor Gyorgy Matolcsy, lifted the base rate by 200 basis points to 9.75 percent, the Magyar Nemzeti Bank said.
The previous change in the key interest rate was a 185 basis points hike on June 28.
The central bank has raised the key interest rate in every policy session since June last year.
On July 7, the central bank had raised the raised the one-week deposit rate by 200 basis points.
“Consistent with its strategy formulated in June, the Monetary Council considers it necessary that the rise in the one-week deposit rate should be incorporated into the base-rate tightening cycle as soon as possible,” the bank said.
“Due to the increased challenges, in order to anchor inflation expectations and mitigate second-round inflation risks, it is warranted to raise the base rate to the level of the one-week deposit interest rate.”
The MNB said it continues to stand ready to respond quickly and flexibly by setting the interest rate on the one-week deposit instrument if warranted by the rise in short-term risks in financial and commodity markets.
The bank observed that upside risks to inflation strengthened further since the June interest rate decision, while the risk of second-round inflationary effects increased.
The further rise in inflation and persistent inflation risks warrant the decisive continuation of the tightening cycle, the bank said.
The bank also said that maintaining tighter monetary conditions for a longer period was warranted to manage increasing second-round inflation risks resulting from persistently negative supply effects.
“The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target in a sustainable manner and inflation risks become evenly balanced on the horizon of monetary policy,” the MNB added.
Capital Economics said all signs point to a sharp economic slowdown this year amid tighter fiscal policy and the euro area on the verge of recession.
“All this suggests that demand will weaken sharply, particularly if the forint remains under pressure and interest rates rise further – we expect the base rate to reach 13 percent,” Capital Economics economist Liam Peach said.
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