At its meeting this week, the Monetary Council of the National Bank of Hungary (MNB) reviewed the latest economic and financial developments and decided to raise the central bank base rate with 125 basis points to 13.00% with effect from September 28, 2022.
Experts recall that the last time the base rate was this high was in February 2000, while it peaked at 11.5% during the 2008 crisis.
MNB says its primary objective is to achieve and maintain price stability. Without prejudice to its primary objective, the Bank preserves financial stability and supports the government’s economic policy, as well as its policy on environmental sustainability.
“The risk of recession in the global economy has increased due to the prolonged Russia-Ukraine war and the European energy crisis. High commodity prices and the drought in Europe may push inflation up further over the short term; however, the first signs of a turnaround have appeared. Growing recession risks, alongside falling commodity and energy prices and transport costs, points to a moderation in global inflation from 2023,” according to the Monetary Council statement.
Inflation remains a challenge
Analysts highlight that raising interest rates means that credit will become more expensive in the economy, causing people to buy less and companies to invest less. This will hurt economic growth, but, in return, it will slow inflation. MNB's official aim is not to achieve economic growth, but to preserve the value of money, i.e. to keep inflation down to around 3%.
The 125-basis-point, or 1.25 percentage point, increase is larger than the 100-basis-point increase the previous month, so the MNB considers it important to increase the pace of interest rate increases. This means that the MNB believes inflation in Hungary remains a challenge and expects it will not peak in the next few months. The pace of the increase will also be influenced by the central bank's view on the disbursement of the EU recovery fund. This money is withheld by the European Commission because of corruption concerns regarding the disbursement of EU funds by the Hungarian government. Whether an agreement on this is reached by the end of the year will be very important for the country's economy.
An hour after the announcement of the rate hike, MNB Governor György Matolcsy announced that it was the last such increase for some time. This will end the cycle of rate hikes introduced since the summer of 2021, with no further rate hikes planned in the near future. Policymakers are likely to want to avoid pushing the Hungarian economy into recession with a very high interest rate. The current larger-than-expected rate hike may also be justified by the fact that inflation is currently picking up due to the summer reshuffle (partial cease) of the utility price cap scheme and could very well reach 20% by the end of this year.
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