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Hungary central bank raises rates unexpectedly for fourth time in two weeks -Breaking


© Reuters. FILE PHOTO : View of the National Bank of Hungary entrance in Budapest, Hungary on February 9, 2016, REUTERS/Laszlo Balogh

Gergely and Krisztina Szakacs

BUDAPEST (Reuters – Hungary’s central bank raised its interest rates unexpectedly on Tuesday, amid a rise in inflation. The move came in the midst of increased pressure on both the forint market and the bond market.

As a result of a more rapid recovery than anticipated from the coronavirus epidemic, the National Bank of Hungary was first European Union central bank that raised interest rates in June.

In spite of mounting evidence that inflationary pressures are increasing, the bank has slowed rate increases in September. Analysts call this a mistake. Then, at its next meeting in October, the bank will increase the pace for tightening.

Although the NBH increased its base rate by an average 150 basis points in June, economists pointed out that more aggressive rates hikes by the Czech Central Bank and Polish Central Bank early this month made the NBH appear to be an exception in the region.

Tuesday’s non-rate setting meeting saw the bank raise its collateralised rate rate from 4.1% to 4.1% by 105 basis point and overnight deposit rates by 45 Basis points to 1.6%. The move allows the bank to increase its interest rate corridor, and gives it the freedom to make decisions.

The bank stated that “Widening the interest rate corridor is an integral component of the strategy for the new phase in monetary policy.”

“It is essential that the central bank maintains price stability by having the right monetary policy space for maneuver.”

After falling to 372 euro per week last week, the forint immediately stabilized and reached 366.1 against the euro at 1403 GMT, up from 367.14 euro.

Peter Virovacz of ING economist said that the action could boost the forint’s value to about 360 by the end the year. He added however that tightening measures at the bank take effect with a considerable lag, due to a more complex policy toolkit.

“It’s like a freight train. He said that the engine was jammed with coal, but that it took some time for it to ignite and get it rolling.

The bank’s Tuesday move is just two weeks following a hike in interest rates of 30 basis points all over the board. It also announced that it will raise its one-week depositrate above the base rate to address short-term risks.

Following up on that promise, the bank increased the deposit rate by two basis points in the following two weeks. It was worth 110 basis points. The current rate is now 2.9%

The bank had to raise the ceiling on the corridor after the last week’s rate hike brought the one-week rates within an inch of the highest interest rate corridor. This Thursday is the due date for the next one-week deposit tender.

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