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National Bank Raises Base Rate for First Time in a Decade

MTI-Hungary Today 2021.06.22.

The Monetary Council of the National Bank of Hungary (NBH) decided to raise the central bank base rate by 30bp to 0.90 percent at a monthly policy meeting on Tuesday.

Central bank policy makers had earlier flagged a possible rate rise at the monthly policy meeting in June against the backdrop of spiking inflation.

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NBH policy makers had kept the base rate on hold at 0.60 percent since last summer, but inflation reached 5.1 percent in both April and May, well outside of the +/- one-percentage-point tolerance band around the central bank’s 3.0 percent mid-term target.

The Council also decided on Tuesday to leave the O/N deposit rate at -0.05 percent and the O/N and one-week collateralised loan rates at 1.85 percent.

The O/N deposit rate and the collateralised loan rate mark the bottom and the top, respectively, of the central bank’s “interest rate corridor”. The base rate is paid on mandatory reserves and preferential deposits.

In a statement released after the meeting, the Council said it “launched a cycle of interest rate hikes to ensure price stability, to prevent inflation risks from having long-lasting effects and to anchor inflation expectations”.

Noting that risks to the inflation outlook “remain on the upside”, the Council said it would assess the need to further tighten monetary conditions “in a data-driven manner at its monthly policy meetings”.

“The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy,” the rate-setters said.

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In its fresh quarterly Inflation Report, the NBH raised its projection for annual average inflation in 2021 to 4.1 percent, from 3.8-3.9 percent in the previous forecast released in March.

It raised its forecast for GDP growth this year to 6.2 percent from 4.0-6.0 percent.

The Council said it “is warranted” to raise the rate on the central bank’s one-week deposit to 0.90 percent, level with the base rate. The NBH will continue to set the one-week depo rate at weekly tenders for the facility, it added.

Since late September 2020, the rate on the one-week deposit has been 0.75 percent, 15 basis points over the 0.60 percent base rate.

Featured photo via Pixabay