Hungary's central bank unexpectedly raised its one-week deposit rate by 50 bps to 7.25% at a weekly tender today, stepping up its policy tightening to curb stubbornly rising inflation now running in double-digits.
The rate hike came after the US Federal Reserve last night approved its largest interest rate increase in more than a quarter of a century to stem a surge in inflation.
The National Bank of Hungary will continue its base rate hike cycle with "predictable and decisive" steps until it sees signs that inflation is peaking, probably in the autumn months, deputy governor Barnabas Virag told reporters after the move.
"The role of the one-week deposit rate has increased again," Virag said, adding the NBH wanted to prevent a rise in risk premia on Hungarian assets leading to a further worsening in the inflation outlook.
Virag said a key moment would come when the pace of price growth starts declining as this would also dampen households' inflation expectations, which the bank was following closely.
"We need to keep going on the current path until inflation declines to around 3% on the policy horizon," he said, adding that later this month the bank would raise its 2022 average inflation forecast from its 9.8% March projection.
With rising energy costs, a tight labour market, fast wage growth and the war in neighbouring Ukraine fuelling further price pressures, the NBH is struggling to bring down inflation while maintaining momentum in the Hungarian economy.
At the same time, the forint has lost close to 7% this year amid worries over European Union disputes holding up recovery funds.
Virag said there was a good chance for 2022 GDP growth to exceed 4% and even come in around 5%, and it was not justified to speak of the risk of a recession in Hungary in 2023.
The forint, which fell to record lows past 400 versus the euro earlier this week, firmed about 0.5% to 395 after the rate hike.
The bank uses the one-week rate to tackle short-term market volatility. Late last month it raised its base rate by 50 basis points to 5.9%. It will hold its next rate meeting on June 28.
Virag said the bank planned to discuss foreign exchange swaps at its next meeting and use the swaps more actively to manage liquidity, holding tenders on a monthly basis rather than quarterly.
The bank has said it will maintain tighter monetary conditions for longer to fend off rising second-round inflation risks and anchor inflation expectations.
