The Monetary Council raised the MNB base rate by no less than 185bps, to 7.75% today. Simultaneously, the O/N and 1-week credit rate was raised 10.25%, meaning that the interest rate corridor, the floor of which is the base rate itself, was reduced to 250bps from the previous 300bps.
All this was quite surprising, as the market had been speculating about the chances of a 100bps base rate hike, in view of the most recent weak performance of the forint, as opposed to the 50bps pace, which was introduced, apparently quite prematurely, just one month ago.
Following the meeting today, vice governor Virág announced that the base rate and the 1-week deposit rate will now be unified again. This means the 1-week deposit rate, the effective sterilisation rate, is going to be raised by 50bps at the next tender on Thursday. Journalists have been seen as speculating (and claiming that actually analysts are speculating) whether this means that the two rates can only move together from this point onwards. As Mr. Virág clarified, NO, the system will remain exactly the same as so far: the MNB reserves the possibility to change the deposit rate flexibly, on a weekly basis if market conditions require.
To us, all this means, in practical terms, that the MNB intends to defend the EURHUF 400 line for now, trying to avoid the impression on the market that it does not really care about where the forint is going. The latter would be pretty much risky, undermining the MNB's credibility in a serious way, in our view. So the Council took the right decision today, we believe.
Importantly, the Council also discussed the Q2 inflation report this morning....
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