Hungary Begins Bond Tapering to Add Punch to Rate-Hike Cycle
(Bloomberg) -- Hungary began to wind down its bond-purchasing program, removing a brake on Europe’s most aggressive monetary tightening campaign after the central bank raised interest rates for a third consecutive month. The forint jumped.
Investors are now looking to gauge how long monetary policy makers may keep up with 30 basis-point hikes each month in the base interest rate, with the latest increase on Tuesday taking the benchmark to 1.5%, the highest in the European Union.
While the central bank didn’t commit to the same pace for September -- when it will re-assess the tightening cycle in light of the new inflation forecasts -- it left little doubt that rates would rise further with inflation forecast to spike this year.
“While they have maintained their hawkish stance, the planned assessment of the tightening cycle in September means they will be less aggressive in” the fourth quarter, said Marek Drimal, an strategist at Societe Generale in London.
Price-growth may exceed 5% again in October or November before it starts to slow, Deputy Governor Barnabas Virag said at an online briefing in Budapest. Policy makers have stressed that they’d continue tightening until inflation is on track to hit their 3% target.
“This is the message we’ve emphasized in recent months and this message hasn’t changed,” Virag said when asked if there’s a chance for a pause in the hikes.
The forint strengthened 0.4% against the euro after the briefing, extending its rally to 3.5% over the last month for the biggest gain among 31 major currencies tracked by Bloomberg.
Policy makers around the world are trying to balance the risk of keeping borrowing costs low to spur economic recoveries as virus variants cause new outbreaks and vaccination campaigns flag against the danger that excessively loose policy may fuel spiraling inflation.
Hungary has been at the forefront of monetary tightening in Europe, trailed by the Czech Republic, which also raised rates back-to-back in June and July and has signaled further hikes. Other nearby non-euro-area EU countries, including Poland and Romania, are putting increases despite intensifying price pressures.
In addition to the rate increase on Tuesday, which applied to both ends of the interest-rate corridor, Hungary’s central bank also began to taper its asset-purchase program.
The bank cut its weekly purchases to 50 billion forint ($169 million) from 60 billion forint as a first step, though it said it would raise the amount again if the market environment warrants it. The tapering would be “gradual,” Virag said.
While the pace of price growth slowed in July from a nine-year high, record second-quarter economic growth data showed that the speed of the recovery may generate further upward inflationary pressure.
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