Hungary Central Bank raises base tax rate

Hungary’s central bank (NBH) has raised its key policy rate by 50 basis points to 6.50% on Tuesday, in line with expectations. Although today’s rate call was in line with expectations, it does represent a turnaround in monetary policy.

The financial web site portfolio.hu is of the view that the majority of the market was expecting this 50-bp monetary tightening, thinking that with that move the NBH could send an appropriately strong message that it is willing to prop up the forint that is weak both from a financial stability and an inflationary point of view, while it can avoid the risk of getting more than what it has bargained for. Whether or not today’s move is the start of a longer tightening cycle will turn out only in the next few months, as market conditions change.

Some market players were still trying to sell a rate cut story in the autumn, while by November the only question was by how much the Monetary Council will raise the base rate. After Hungary’s downgrade by Moody’s to non-investment grade last Friday analysts thought the MNB could go two ways: go for a 50-bp rate hike, which would leave the door open for further increases, or take rates 100-200 bps higher, which would close the gap faster between the short-term forward rate agreements and the actual base rate. The latter was not a widely forecasted scenario and in the end the majority's projection proved right.