Hungary central bank seen raising base rate by 25 bps next week

BUDAPEST: The National Bank of Hungary (NBH) is expected to raise its base rate by 25 basis points to 0.85% next Tuesday in response to rising price pressures, making it the first European Union central bank to tighten policy since the coronavirus pandemic.

Deputy Governor Barnabas Virag said last month that monetary policy would enter a new phase from June as the economy fully reopens, and that the central bank would adjust short-term rates proactively to tackle rising inflation risks.

Hungary's economy is expected to record a double-digit jump in growth in the second quarter, while annual headline inflation ran at 5.1% in May, unchanged from April and overshooting the bank's 2% to 4% policy target range by a wide margin.

The consensus forecast of 19 economists in a June 14-16 Reuters poll projects the bank will raise its base rate by 25 basis points next Tuesday. Forecasts for the first base rate hike in nearly a decade range from 15 to 30 basis points.

The overwhelming majority of analysts also expects the NBH to raise its one-week deposit rate by 15 basis points to 0.9% from 0.75% by the end of this month, which would bring it broadly in line with the prevailing base rate.

"Given that there is no need to keep a spread between the policy rate and the deposit rate following the better recent performance of forint, we expect the NBH to equalise both rates from June," economists at Barclays said in a note.

"As the effective policy rate, the weekly deposit rate at 0.75% is already 15bp higher than the policy rate, we expect a bigger hike in the policy rate to make the NBH's first tightening move more effective," the economists said.

Barclays projects a 30-basis-point hike in the base rate next Tuesday, followed by another 10-basis-point hike in the third quarter. The poll sees the base rate rising to 1.5% by the end of 2023.

The NBH, whose governor Gyorgy Matolcsy is a key ally of Prime Minister Viktor Orban, has gradually cut its benchmark base rate to support the economy in recent years, to a current record low of 0.6%.

However, as the economy recovered quickly from the third wave of the pandemic, inflation also rose above expectations, while an expansionary budget passed for the 2022 election year compounded the bank's worries over inflation.

The poll sees average inflation at 4.2% this year, exceeding the bank's target range, retreating to 3.2% by 2023. Economic growth is seen at 6.6% this year, well above last month's 5.1% forecast after stronger-than-expected first-quarter data.

"We forecast the HUF to strengthen in the coming quarters due to the orthodox and hawkish (NBH) and solid growth fundamentals," Societe Generale economist Marek Drimal said in a note.