June 23, 2021

Hungary central bank unexpectedly hikes deposit rate, may need to act again

By Krisztina Than and Gergely Szakacs

BUDAPEST, Sept 24 (Reuters)Hungary’s central bank unexpectedly raised the interest rate on its one-week deposit facility NBHK by 15 basis points to 0.75% on Thursday, saying the move was aimed at preventing a rise in inflation risks.

The rate hike at Thursday’s deposit tender came two days after the National Bank of Hungary kept all of its main interest rates unchanged at a rate-setting meeting.

The central bank said on Thursday it was committed to maintaining price stability even amid the coronavirus pandemic.

“The NBH wants to prevent a rise in inflation risks due to the current uncertain environment, and thus decided to raise the rate on the one-week deposit,” it said in a reply to questions.

The bank also said it would monitor short-term market rates closely to ensure that they are “in every sub-market and at all times” consistent with the level of short-term rates deemed optimal to reach price stability.

The rate hike lifted the forint EURHUF= from five-month-lows around 365 per euro to around 363.5 but market players said it was doubtful if the move would be sufficient to shore up the currency in a lasting way.

The forint has been weakening, underperforming other currencies in Central Europe, as the second wave of the coronavirus pandemic has undermined expectations for a fast economic recovery in Hungary, and inflation is on the rise.

A global deterioration in sentiment has also made emerging currencies vulnerable. The central bank said earlier on Thursday that it had no exchange rate target.

“There was a knee-jerk reaction in the forint,” said Peter Virovacz, an analyst at ING.

“I do not think that this move would be enough. If the forint makes the central bank uneasy with regard to inflation developments, then they may need to raise the deposit rate again next week.”

Given that global developments are also playing into the weakening, not much can be done about that part, so the central bank is in a tight spot, he said.

(Additional reporting by Anita Komuves; Editing by Hugh Lawson and Catherine Evans)

(([email protected] ; https://twitter.com/szakacsg ; +36 1 882 3606 ; https://www.reuters.com/journalists/gergely-szakacs))

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