Here's Why Base Rate to Remain High in Hungary at 13%
- 1 Mar 2023 6:49 AM
- Hungary Matters
The Council also decided to keep the central bank’s O/N deposit rate at 12.5% and the O/N collateralised loan rate at 25%. The decision was in line with expectations.
The rate-setters signalled an end to the tightening cycle at their monthly policy meeting in September, but said tight monetary conditions would be maintained with a focus on sterilising liquidity and improving monetary policy transmission.
On October 14, the policymakers announced a decision to launch O/N deposit quick tenders on a daily basis. The central bank has since offered the liquidity sterilisation instrument at a rate of 18%.
In a statement released after the meeting, the Council said it was necessary to maintain the current level of the base rate over a prolonged period in order to achieve the central bank’s inflation target in a sustainable manner.
The Council said disinflationary effects were expected to increase in the coming months, “causing a turnaround in inflation”. It added that tight monetary conditions contributed to avoiding second-round inflationary effects.
Energy, commodity and food prices have fallen below their pre-war levels, the statement said, adding that the moderating effect on pricing arising from the fall in domestic demand and, from the spring months, the fading of base effects would support the decline in inflation.
The Council said it expects a gradual decrease in inflation in the first half of the year before a more significant decrease from the middle of the year. CPI will return to the central bank tolerance band in 2024, it added.
GDP growth is also expected to pick up in the middle of the year, the Council said.
NBH Deputy Governor Barnabás Virág told a press conference that a change to the 13% base rate was not on the agenda. He said that although disinflationary effects were strengthening, falling domestic demand was acting as a “disciplining force”.
Prices are expected to remain at peak levels for months, which will be followed by a slow decline in inflation, before accelerating in the second half of the year, he said.
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