Hungary Shocks With Hawkish Message After Restrained Rate Hike
(Bloomberg) -- Hungary followed a restrained interest-rate hike that underwhelmed markets with a surprisingly hawkish message, including a pledge to raise one of its key rate this week to shield the currency. The forint surged against the euro.
The central bank increased the benchmark rate by 30 basis points to 2.1%, double the pace of tightening in September and October and matching the median estimate in a Bloomberg survey.
But the move, which was less than what some peers have delivered in central Europe, was overshadowed by a post-decision statement, which said the bank would raise the 1-week deposit rate by more than 30 basis points on Thursday, effectively delivering a bigger tightening step.
“We’ve entered a new phase that requires us to accelerate interest rate hikes,” Deputy Governor Barnabas Virag told an online briefing on Tuesday. He said the central bank would use the one-week facility “actively.”
As most commercial-bank deposits are parked in the one-week facility, re-introducing a spread between it and the base rate will effectively make the one-week facility the benchmark for policy. It’ll give the central bank a powerful tool to quickly react to market developments as the one-week facility is set on a weekly basis.
The forint, which lost more than any currency in the world last week, jumped 0.6% against the euro after the statement and the briefing, the biggest gain since Oct. 28. It initially reversed gains immediately after the rate decision.
To further bolster the currency, the central bank said it would no longer provide forint liquidity via foreign-currency swaps and would “actively use” a swap facility to provide foreign-currency liquidity.
“The NBH really wanted to deliver a hawkish message today,” said Marek Drimal, a strategist at Societe Generale SA, using the Hungarian central bank’s acronym. “The newly announced measures should remove some downside risks for the forint.”
While Hungary initially led the European Union with the bloc’s most aggressive monetary tightening campaign during the summer, it fell behind recently as peers in the bloc’s eastern wing picked up the pace. Poland raised its benchmark by 75 basis points this month and the Czechs shocked markets with a 125 basis-point move.
Hungary’s central bank sees inflation rising above 7% in November, according to Virag, who added that the surge in price-growth wasn’t temporary as some monetary authorities have argued. He said Hungary would continue to tighten policy in a way that also raised real rates.
Central bankers had to balance currency pressures and inflationary risks associated with Prime Minister Viktor Orban’s pre-election expenditures -- the government aims to spend 15% of gross domestic product ahead of next year’s election -- with the latest data on Tuesday showing a sharp slowdown in economic growth in the third-quarter. Today’s actions left little doubt about which weighed more in their decision.
“A persistent rise in external inflationary pressures and increasing second-round inflation risks have necessitated more extensive and longer lasting monetary policy tightening,” the central bank said in its statement.
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