The MNB tightened again, but government speakers stole the show

HUNGARY - In Brief 19 Oct 2021 by Istvan Racz

At its regular monthly rate-setting meeting, the Monetary Council caused no surprise, in the sense that it did exactly what it previously said it would do. It raised the base rate and the two ends of the interest rate corridor by another 15 bps, making the base rate 1.8% and the total rate hike 120 bps since June. It acknowledged that inflationary risks have risen over the past month, blaming most of it on external factors, and stressed that risks keep pointing upwards. It said it expects the headline CPI-inflation rate to return to target in H2 2022 (a month ago the MNB said Q3 2022), and it confirmed its commitment to continue rate hikes until 'inflationary prospects have stabilised around the 3% target in a sustainable way and risks have become balanced', specifically mentioning the monthly frequency of prospective rate hikes but omitting the previously used 'in small steps' phrase. It reiterated the intention to 'dynamically' phase out the forint-providing FX swap instrument, adding the Bank is preparing for new steps in the forthcoming months to secure the normal operation of the FX swap market. It also said that direct purchases of government bonds will be kept at HUF40bn weekly for the rest of this year, just as decided in September.The forint actually weakened on the announcement, in part because some on the market may have thought that the rapid deterioration of the inflation picture could convince the MNB to accelerate rate hikes. (This we do not believe the MNB will do unless something really dramatic happens.) The other reason was today's interview given by Márton Nagy, formerly MNB vice governor and currently the prime minister's chief economic advisor. Mr...

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