Brussels (Brussels Morning) The Hungarian National Bank (MNB) increased its base interest rate from 0.6% to 0.9% on Tuesday in response to growing inflationary pressures in the wake of the coronavirus pandemic.
This makes Hungary the first EU member state to respond to post-pandemic inflation by raising the base rate. The MNB is instituting monthly trend reviews to determine whether further adjustments are needed, Reuters reported.
“The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy”, MNB announced in a statement.
The bank’s decision to raise the basis rate by 30 basis points slightly exceeded market predictions of a 25-point increase.
While the MNB kept the overnight deposit rate at negative 0.05%, it announced plans to bring the rate in line with the base rate.
The forint exchange rate stood at 351.15 per euro after the announcement on Tuesday afternoon, in contrast with the roughly 345 rate that prevailed earlier this month, when the market was anticipating the rate hike.
MNB to keep inflation ‘anchored’
“In the Monetary Council’s assessment, it is of key importance to ensure that inflation expectations are properly anchored”, MNB noted in observing that “upside risks to the outlook for inflation have generally increased”.
The bank cited growing international freight costs and commodity prices as indications of “a higher external inflation environment“.
Liam Peach, an economist at the UK consultancy Capital Economics, pointed out that economic growth is picking up pace and that inflation would likely continue to grow this year.
He expects the MNB to respond with “additional interest rate hikes in the second half of this year.”
Earlier in the week, the Finance Minister of Hungary, Mihály Varga , underlined how it is MNB’s responsibility to keep inflation under control.
“Monetary policy has the tools in this regard to ensure that inflation becomes substantially lower”, he said, adding that to suggest that it was “up to the budget” was erroneous. “This is up to the ability of monetary policy to act”, he declared.
