Hungary hikes rates into double digits as inflation keeps rising

By Gergely Szakacs and Krisztina Than

BUDAPEST (Reuters) -The National Bank of Hungary (NBH) raised its base rate by 100 basis points to 10.75% on Tuesday, taking borrowing costs into double-digit territory for the first time since late 2008, and it flagged more rate hikes ahead due to rising inflation.

“It is warranted to tighten the base rate in a decisive manner in order to anchor inflation expectations and mitigate second-round inflation risks,” the rate-setting Monetary Council said in a statement, adding that Hungary’s economy was expected to slow in the second half of the year.

Deputy Governor Barnabas Virag said a government decision to scrap price caps on energy for higher-usage households would add 3 percentage points to the expected inflation rate over the 12-month period to August 2023.

“The NBH will carry on with its interest rate moves until we can see a clear turnaround in inflation,” Virag told a briefing, adding the bank’s focus was on curbing inflation and second-round impacts even as the economy was set to slow.

“Global recession risks have increased, signs of a slowdown are visible in the Hungarian economy as well, but we can assess the pace and size of this slowdown only over the coming months,” he added.

Weaker currency

Tuesday’s decision was in line with the median forecast of 14 economists in a Reuters poll last week. At 1410 GMT, the forint, which sank to a record low versus the euro earlier this month, traded at 400.20 per euro, a touch stronger than immediately before the rate announcement.

The weakness of the forint is complicating the NBH’s inflation challenge.

Hungary’s budget and current account deficits and its lack of access to European Union funds had prompted investors to sell the forint amid worsening sentiment on international markets.

This is set to raise inflation further, while helping to rein in the budget deficit.

The forint has recovered to around 400 to the euro after weakening past 416 earlier this month, it is still down nearly 8% versus the euro this year, underperforming regional peers.

Analysts now see the base rate rising to 12% by the end of 2022, which would be its highest level in nearly two decades. Some analysts project even higher rates.

“Overall, we expect interest rates to rise to 13.00% later this year… We think the risks are probably skewed to the upside, particularly if European energy supply is severely disrupted, global growth concerns rise and the forint comes under further pressure,” Capital Economics said in a note after Tuesday’s rate hike.

(Reporting by Gergely Szakacs and Krisztina Than; Editing by Hugh Lawson and Gareth Jones)