Hungary’s Central Bank Ends Bond Purchase Program, Policy Makers Vow ‘Lengthy’ Tightening

The National Bank of Hungary ended its quantitative easing program as policy makers vowed to pursue a “long” tightening cycle to combat soaring inflation.

Hungary’s central bank brought its program of corporate and government bond purchases to an end as policy makers seek to tighten monetary conditions in the face of rampant inflation. Nevertheless, the bank said it does not rule out “targeted and temporary” government bond purchases if necessary. The central bank will closely monitor liquidity developments and will be ready to step in in the market "with occasional and targeted government securities purchases if necessary."
"Occasional government securities purchases will not indicate a change in the stance of monetary policy," the bank said in a statement. Several officials from the bank stressed that monetary tightening was set to continue in the long run.

Aggressive tightening
The National Bank of Hungary raised its base rate by 30 basis points to 2.4% earlier this week, its highest level since May 2014. The bank signaled it would continue the rate hikes next year in order to anchor rising inflation expectations. The central bank also raised its one-week deposit rate, used to tamper financial market volatility, by 30 basis points to 3.6% in what was the fifth consecutive weekly increase.
Policy makers delivered six interest-rate hikes over the past month as the central bank is waging battles on multiple fronts: against runaway consumer prices and a widening budget deficit, which threatens the country’s financial stability.
Hungarian headline inflation rose to a 14-year high of 7.4% in November and core inflation rose to 5.3%, both sharply above the central bank’s 2% to 4% target range. The central bank this week published a new inflation forecast, raising its outlook for next year to a range of 4.7% to 5.1%, from 3.4% to 3.8% earlier.
Prime Minister Viktor Orbán, facing a tightly fought general election in spring 2022, has ramped up spending with generous handouts to the electorate, including pension increases and tax break for families raising children.

Protracted battle
Central bank Deputy Governor Barnabas Virág said after the rate increase that the tightening cycle would be “long” and extend well into 2022.
The same message was reiterated a couple of days later by Deputy Governor Csaba Kandrács, who told news website napi.hu that the central bank would raise interest rates further to combat high inflation. "We must prepare for a protracted battle against inflation," Kandrács said. "Timing, consistency and determination will be key to success. We will continue to do what needs to be done."
Consumer prices would fall back to within the central bank's target range late next year, Kandrács said, adding that core inflation will only start declining substantially from the second half of 2022, “that is why we need further rate hikes."

Weak forint
The central bank’s ongoing monetary tightening cycle has failed to significantly strengthen the forint, which fell to a record against the euro in November. The currency gained after the central bank announced it would continue raising rate and would end its quantitative easing program. Nevertheless, it was trading just 1.7% stronger than the record low reached on Nov. 23.
When asked about the depreciation of the forint, Kandrács said the foreign currency market was a key part of monetary transmission. "After its last meeting, the Monetary Council emphasized that it aims to wrestle down inflation as soon as possible with all tools available and on all channels of monetary policy transmission," Kandrács said, adding that the central bank " will strongly adhere to that."