Unchanged deposit rate and a temporary measure to fix basic food prices

HUNGARY - In Brief 20 Jan 2022 by Istvan Racz

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The MNB has left the fixed interest rate for 1-week deposits for today's weekly tender unchanged at 4%. This means that there has not been any sterilisation rate increase since the start of this year.This decision seems to substantiate the suspected rule of thumb that the Bank refrains from raising the sterilisation rate if EURHUF is standing safely below the 360 line. Holding the current exchange rate of EURHUF 355-356 would mean a 1% yoy nominal appreciation for the forint against the euro in January.The other hypothesis, which we think the MNB's rate decision of today substantiated is that the December CPI-inflation data, with the headline rate remaining unchanged at November's peak value of 7.4% yoy, will not be enough to convince the MNB to tighten further, even though the monthly actuals were materially above the ones presented in the Bank's Q4 inflation forecast. For sure, the Monetary Council is still likely to raise the base rate (currently 2.4%) next Tuesday, but that can be only symbolic, as the base rate currently does not serve as the effective sterilisation rate, or in other words the marginal interest rate of the HUF money market.Anyway, we believe that the MNB's tightening course (or cycle, as most would name it) is still on and remains intact, but it does not appear to be a strictly monotonous ascending trend any more.A potentially related issue is a recently announced 3-month consumer price freeze for a limited number of basic food items (baking flour, milk, vegetable oil, sugar, and certain types of chicken meat and pork), a government measure similar to the one currently in force on fuel prices (the latter for the period between mid-November and mid...