A Thanksgiving Day gift from the MNB

HUNGARY - In Brief 25 Nov 2021 by Istvan Racz
The MNB has set its fixed interest rate for this week's 1-week deposit tender at 2.9% today. This represents another 40 bps hike from last week, and a total 110 bps increase in the effective sterilisation rate, including all three steps carried out over the last nine days. By this step, the MNB is getting ahead of its Czech, Polish and Romanian colleagues in the ongoing race to raise central bank policy rates, in the sense that it has now the highest of those within this region.The decision indicates quite clearly that the Bank is now highly sensitive to the forint's current moderate weakness, especially in the light of the fact that EURHUF has retreated somewhat from above 370 to 368-369 over the last two days. The impression it creates is that the MNB does not want to see a nominally depreciating forint, even if that depreciation, against the euro of course, is only a moderate one on year-on-year basis (please, see our previous note of two days ago on this subject). Effectively, the MNB appears to be intending to drive the EURHUF rate towards the 360 level.We still see the new system of weekly adjustments to the sterilization rate as being risky. The MNB may become unpredictable, which adds to the risk premium. Or it may become too predictable in the very short term, if a scheme is detected behind weekly decisions, which may make market speculation easy. In addition, three rate hikes in a matter of nine days may appear somewhat panicky, and it certainly draws the attention of the otherwise relatively uninterested domestic public, with the consensus conclusion on the streets that there must be a really serious problem with inflation. (When your neighbour, who happens ...

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