Hungary's Central Bank Raises Base Rate to 18-Year High

At its meeting on August 30, 2022, the Monetary Council of the National Bank of Hungary (MNB) reviewed the latest economic and financial developments and decided on raising the central bank base rate by 100 basis points to 11.75% - the highest in 18 years - with effect from August 31, 2022.

This means that the base rate is higher than it was during the 2008 financial crisis, when it peaked at 11.5% after an extraordinary rate hike between 22 October and 25 November 2008. The last time the base rate was at a similar level to the current one was in May 2004 (when the 12.5% level reached at the turn of 2003-2004 was gradually reduced).

A statement by the Monetary Council says that MNB's primary objective is to achieve and maintain price stability. Without prejudice to its primary objective, the Magyar Nemzeti Bank preserves financial stability and supports the Government’s economic policy, as well as its policy on environmental sustainability.

The Russia-Ukraine war, a possible new wave of Covid-19, high commodity prices and ongoing disruptions in supply chains are increasing recession risks in the global economy which are also exacerbated by a deterioration in confidence indicators. The effects of persistently high commodity and energy prices and the drought in Europe are increasing external inflationary effects further in the coming months; however, from 2023 onwards, global inflation is expected to fall alongside commodity and energy prices as economic growth declines.

Investor sentiment has been volatile. Risk appetite has been driven by news on the war, expectations for interest rate increases by the world’s leading central banks, concerns caused by persistently high inflation, fears of recession and developments related to the coronavirus pandemic. In the first half of 2022, global prices of several commodities reached historic highs and then started to decline recently. However, they remained at high levels. Gas and electricity prices continued to rise significantly in European markets.

The Federal Reserve raised interest rates by 75 basis points at the end of July. In the CEE region, the Czech central bank did not raise its base rate any further in August, while the National Bank of Romania increased its key policy rate by 75 basis points.

According to the central bank, in the first half of 2022, the Hungarian economy grew strongly: GDP rose by 6.5% in the second quarter of 2022 relative to a year earlier. All sectors of the national economy contributed to economic growth, except for the agricultural sector. In June, industrial output continued to grow on an annual basis, while the volume of construction activity decreased. Following strong growth at the beginning of the year, the turnover of retail stores has been gradually declining since April. The labour market continues to be tight, and the unemployment rate remains low. High-frequency data indicate a clear slowdown in economic growth since the beginning of June. The global economic slowdown and the effects of high energy prices are increasingly reflected in the general deterioration of sentiment indicators.