Hungary’s Central Bank Maintains Hawkish Approach Amid Inflation Concerns

Hungary’s Central Bank Maintains Hawkish Approach Amid Inflation Concerns

The Central Bank of Hungary has announced its decision to continue with a hawkish approach to monetary policy. This announcement comes in the aftermath of an emergency interest rate increase that successfully averted a currency crisis in 2021. The Hungarian forint showed appreciable growth against the euro following this decision, showcasing the immediate impact of the bank’s monetary policy.

Deputy Governor’s Emphasis on Tight Monetary Policy

Barnabas Virag, the bank’s Deputy Governor, has highlighted the necessity for Hungary to maintain a “tight” monetary policy while exercising caution with further rate cuts. This precautionary stance is due to the current inflation rate, which remains “unacceptably high”. This statement was made following a fifth consecutive monthly reduction of one full-percentage point to 13% on the one-day deposit facility, aligning it with the benchmark.

Disagreement Over Economic Policy

Investors have been seeking clarity on the monetary policy for the rest of the year, following a divergence of opinion between the government and the central bank over economic policy. Economic Development Minister, Marton Nagy, voiced concerns that an overly cautious rate policy could potentially obstruct the economic recovery from a year-long recession. However, Virag countered this argument by stating that addressing inflation is a crucial step for sustainable economic growth.

Uncertainty over Future Rate Cuts

While Virag emphasised that further rate cuts would not be implemented automatically, he did not provide a definitive commitment to reduce the size of rate cuts for the rest of the year. He stressed the importance of maintaining tight monetary conditions for price stability. The forint, which had experienced a six-day loss, rose by 0.8% against the euro following the rate decision. Prior to the meeting, the Hungarian currency had been the second-worst performing globally.

Contrasting Monetary Policies: Hungary vs Poland

Hungary’s cautious monetary policy forms a stark contrast with Poland’s decision to make a sharp, three-quarter percentage point rate reduction earlier in the month. This move led to a significant sell-off of the zloty, Poland’s national currency.

Inflation: A Persistent Issue

Inflation in Hungary is currently the highest in the European Union (EU), slowing down to 16.4% in August from over 25% at the beginning of the year. The Central Bank has revised its inflation forecast to an average annual 17.6%-18.1% for this year and between 4%-6% for the next year, with a target of achieving 3% inflation.