Hungary central banker flags possibility of June base rate hike

BUDAPEST: Hungary's monetary policy will enter a new phase from June as the economy fully re-opens and the central bank will adjust short-term rates proactively to tackle rising inflation risks, deputy governor Barnabas Virag said on Monday.

Rate rises could precede any decision about asset purchases, and the June inflation report would be critical in assessing risks, Virag said.

The National Bank of Hungary cut its base rate to a record-low of 0.6% over the past several years, and with the first rate hike flagged for June, the Hungarian bank would be the first in Central Europe to enter into rate tightening due to a jump in inflation as the coronavirus pandemic ebbs.

"This (new phase of monetary policy) will be a data-driven process, in several steps...and the possibility of a hike in the base rate is worth assessing already in June," Virag told reporters.

His comments sent the Hungarian forint to a five-month-high versus the euro.

Virag said the economy will rebound dynamically from the pandemic-induced shock, with GDP growth expected to be closer to 6% this year, due to a strong rise in demand.

Virag said upside inflation risks have clearly risen since March, and the bank would do everything to prevent second-round effects.

"We must not underestimate the risks of a sustained rise in inflation, and we will react to inflation risks pro-actively," he said.

"We will deploy a mixed strategy: we will shape short-term rates proactively ... working on the phasing out of crisis management tools in parallel with that."

He said the bank would react to sustained inflation risks by changing its key base rate, while the one-week deposit rate will be used to tackle short-term shocks in risk premia.

The NBH left its base rate at 0.6% and the overnight deposit rate at -0.05% at its last rate meeting in April. The next meeting is due next Tuesday.

Hungary's headline inflation shot up to its highest since 2012 in April, hitting a year-on-year rate of 5.1%while the Czech Republic also saw a stronger-than-expected jump that reinforced rate hike expectations there.

The latest signs of price pressures in central Europe pushed inflation above the top end of the two countries central banks' target ranges. So far markets have only tipped the Czech National Bank to react this year with an interest rate increase.

Central Europe's price pressures stem largely from fuel prices or tax changes and come as policymakers look to maintain an economic recovery from the COVID-19 pandemic.

With restrictions easing and people returning to shops and restaurants, demand is seen as boosting inflationary risks.

Virag said the bank would maintain its bond purchasing programme which has helped support the local bond market.

He said the current weekly purchases of 60 billion forints were appropriate but the bank could increase its purchases in case of market turbulance.