Unusually big rate hike from the MNB

HUNGARY - In Brief 18 Nov 2021 by Istvan Racz

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The MNB has just announced that it will pay an 2.5% interest rate on the 1-week deposits placed with it at today's tender. This represents a 40bps increase compared to the new level of the base rate, as set two days ago, and a full 70bps increase from last Thursday's tender.The fact that the 1-week deposit rate is set higher than the base rate is no surprise, of course, as it was already hinted at with a significant amount of emphasis by vice governor Virág on Tuesday afternoon. But even so, the size of the total hike is impressive, especially seen against the MNB's traditional small-step approach. It appears that the Bank indeed wanted to impress the market after the nearly runaway-style October inflation data, stabilising the EURHUF exchange rate and matching the sizeable interest rate steps carried out by other CEE central banks (Poland: +75bps, Czechia +125bps) recently.According to the new system of monetary policy decision-making, next week's 1-week tender will be another opportunity for the MNB to reset the effective sterilisation rate. We expect the decision to depend primarily on the forint's momentary position on that occasion.By the way, the government sector's Q3 net financing data has been reported today. The whole government sector's net financing requirement was 4.2% of GDP in Q3 and 4.6% of GDP in the first nine months of this year. At end-September, the government sector's consolidated gross debt reached 80.5% of GDP.This data look quite good, so at first glance, it is genuine good news. But on second thought, the likely policy consequences are less positive. This is because to get to the 7.5% annual fiscal deficit target, the government can (and most ...