Hungary Takes Pole Position for EU’s First Rate Hike of 2021

Hungary moved into pole position to implement the European Union’s first interest-rate hike since the pandemic as soaring inflation prompts policy makers to act in the bloc’s east.

The nearby Czech Republic had been the EU’s most likely first mover until Hungarian central bank Deputy Governor Barnabas Virag said Monday that surging prices will be met by tighter monetary policy as soon as next month -- sparking gains in the forint.

The bank should consider lifting its benchmark rate in June as part of a “data-driven” tightening cycle carried out in several steps, Virag told a briefing in Budapest. Stimulus measures will also be phased out eventually, though quantitative easing will continue and volumes may even rise if warranted, he said.

Hungary Takes Pole Position for EU’s First Rate Hike of 2021

“Inflation risks have unequivocally risen,” Virag said. “The central bank wishes to respond to sustained inflation risks via the benchmark rate.”

Talk of rate hikes in the EU’s east comes as the world’s major central banks say they’ll maintain loose monetary policy amid a bout of inflation they deem temporary. While Denmark’s central bank raised its key interest rate in March, it described the move as “technical” and not intended to influence money-market rates.

Virag’s comments, on the other hand, marked a break from what had up to now been a wait-and-see approach to inflation in Hungary. Consumer prices jumped 5.1% in April, the EU’s fastest pace and already more than the 5% peak the central bank had earlier projected.

While inflation is still forecast to slow in the summer to back inside the official target range -- set at 1 percentage point either side of the 3% goal -- price pressures are materializing over the longer horizon, according to Virag.

Hungary last raised borrowing costs in September, when the one-week deposit rate was lifted to 0.75%, 15 basis-points above the benchmark. While Virag didn’t say how much the benchmark would rise this time around, he said it needs to have an “effective” impact on asset markets.

“This is a significant development,” Goldman Sachs economist Kevin Daly said of Hungary’s tightening plans. “It’s clear that they’re interpreting the latest inflation data in quite a hawkish fashion.”

Goldman Sachs is penciling in a quarter-point hike in the benchmark rate in June, plus another 15 basis points in the third quarter. Citigroup Inc. sees more aggressive tightening, with the base rate doubling to 1.2% by September as a result of four consecutive 15 basis-point increases, according to Budapest-based economist Eszter Gargyan.

The three-month Budapest inter-bank rate rose six basis points to 0.89%, the first increase in more than a month. The government’s forint bond yields rose across the curve, with 10-year rates adding to their steepest loss in more than a year last week. The benchmark three-year note led declines with the yield rising 12 basis points to 1.64%.

The forint strengthened as much as 0.7% against the euro, reaching its strongest level since August.

Government debt costs have risen despite 2.1 trillion forint ($7.2 billion) of bond purchases by the central bank. That included 69 billion forint of purchases last week -- higher than the 60 billion forint weekly target. The central bank stands ready to boost QE purchases depending on future market developments, Virag said.

“Our sovereign bond purchase program is the most effective tool to stabilize the long end of the yield curve,” he said. “That’s why phasing out the program requires extraordinary caution to maintain market stability.”

©2021 Bloomberg L.P.

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