Hungary’s central bank reaffirmed a more hawkish tilt in monetary policy after completing the unwinding of an emergency interest rate hike that staved off a currency crisis last year. The forint rose against the euro.
(Bloomberg) — Hungary’s central bank reaffirmed a more hawkish tilt in monetary policy after completing the unwinding of an emergency interest rate hike that staved off a currency crisis last year. The forint rose against the euro.
Hungary needs “tight” monetary policy and must be “cautious” with further rate cuts as inflation remains “unacceptably high,” Deputy Governor Barnabas Virag said at an online briefing on Tuesday. He spoke after a fifth full-percentage point monthly cut to 13% on the one-day deposit facility, aligning it with the benchmark, which will revert to be the key rate.
Investors had been awaiting guidance for the monetary policy outlook for the rest of the year after the government and the central bank clashed over economic policy last week. Economic Development Minister Marton Nagy had warned that an excessively cautious rate policy would restrain an economic recovery from a year-long recession. Virag replied that the central bank needed to tackle inflation for sustained economic growth.
“Tight monetary conditions are needed in order to reach price stability,” Virag said, reiterating that further rate cuts would no longer be made in “autopilot” mode. At the same time, in response to a question, he declined to commit to reducing the size of rate cuts in the rest of the year.
The forint snapped six days of losses to rise as much as 0.8% against the euro after the rate decision. The Hungarian currency had been the second-worst performing currency globally in the week leading up to today’s meeting.
Hungary’s monetary policy caution follows an unexpectedly sharp, three-quarter percentage point rate reduction in Poland earlier this month that triggered a zloty selloff. By contrast in Hungary, where the key interest rate is more than double Poland’s, the interest rate cut was “well telegraphed,” said Nick Rees, a currency market analyst at Monex Europe.
“Therefore, while the well telegraphed normalization of the NBH’s policy stance has done little to disturb FX markets today, the NBH remained hawkish in their communications nonetheless,” Rees said, using the acronym for the National Bank of Hungary.
While Hungary’s effective interest rate is still by far the highest in the EU, so is inflation, which slowed to 16.4% in August from a peak of more than 25% at the start of this year. The central bank on Tuesday raised its inflation forecast to an average annual 17.6%-18.1% for this year and between 4%-6% next year. The central bank targets 3% inflation.
“Inflation is definitely dropping, but it’s still unacceptably high,” Virag said.
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