Hungary central bank leaves rates steady as inflation spike looms

BUDAPEST: The National Bank of Hungary left interest rates unchanged on Tuesday, as widely expected, and pledged to prevent any sustained rise in inflation as the economy recovers from pandemic-induced shock.

The NBH said it considers an expected jump in inflation temporary but that it would closely monitor for any possible second-round effects.

"It is the NBH's clear intention to prevent the current uncertain environment from causing a sustained rise in inflation," the Monetary Council said in a statement.

"The Monetary Council reiterates that if warranted by an increase in upside risks to inflation, the NBH will be ready to use the appropriate instruments."

The bank also revised its open-ended QE programme on Tuesday and said it would perform the next revision when its bond purchases reach 3 trillion forints ($9.98 billion), from around 2 trillion now.

The NBH left its base rate at 0.6% and the overnight deposit rate at -0.05%, in line with the unanimous forecast of economists in a Reuters poll. At 1323 GMT, the forint traded at 363.10 versus the euro, weaker from 362.65 before the announcement.

The overwhelming majority of economists also expect the NBH to leave its one-week deposit rate steady at 0.75% - a level where it has stayed since September's 15-basis-point hike - at least through to the end of the third quarter.

"There is a lot of uncertainty about how inflation will respond to the reopening of the economy in the next few months, but we think the headline rate will stay above 3% this year and return to target in early 2022," said Liam Peach at Capital Economics.

"That said, with inflation stuck above target and the forint near an all-time low, we think the balance of risks are skewed towards higher short-term interest rates in the next few months."

The central bank expects headline inflation to approach 5% in the second quarter, driven by fuel prices and tax changes, overshooting its 2%-4% target range by a wide margin.

However, it sees tax-adjusted core inflation, its preferred measure of lasting price trends, close to its 3% policy anchor this year.

"With inflation expectations anchored, we do not expect second-round effects according to our baseline scenario," the Monetary Council statement said.