No sterilisation rate hike has taken place today

HUNGARY - In Brief 17 Mar 2022 by Istvan Racz

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At today's 1-week deposit tender, the MNB kept the fixed interest rate unchanged at last week's 5.85%. This surprised us a bit, as we expected +25-30bps, despite the fact that the forint had appreciated quite substantially, back to EURHUF370, in recent days. The forint has actually weakened slightly on the decision, to EURHUF 371-372.Normally, such a soft decision could send out the message that the MNB is satisfied with EURHUF at 370-375, and it does not intend to drive the forint further to the strong side of the 370 line. But this time around, the Monetary Council is set to hold its monthly rate-setting meeting in a few days' time, on March 22, Tuesday, on which occasion it is also scheduled to discuss the Bank's quarterly inflation report. Anyway, it is supposed to be a distinguished policy meeting, at which the Council should react to the war impact for the first time. So maybe the Bank did not want to demote that meeting by preempting its conclusion with a further rate hike at this week's tender.This is just speculation on our part, honestly. Anyway, we expect another increase in the base rate next Tuesday, by at least 50bps, but possibly up to 100bps, to 3.9-4.4%, with a view to keeping pace with the effective sterilisation rate. True, the MNB may not be quite happy to raise the base rate significantly so close to the election day on April 3, but not taking any action on Tuesday would be rather risky, and the additional forint stability potentially earned by the higher base rate could be worth politically more than leaving interest rates unchanged on this occasion.