NBH's hikes by another 50 bps

The National Bank of Hungary raised its base interest rate for the third time this year – this time by 50 basis points. Hence, the accumulative rise in the base interest rate since June has thus reached 175 basis points. According to statements from NBH President Jarai, the Monetary Council considered two rate hike options on Monday, by 25 bps or 50 bps, with the overwhelming majority of Council Members voting for a more aggressive tightening of the monetary policy.

The Monetary Council’s decision was based on inflation risks and the uncertainty regarding the government’s ability to draw its ambitious fiscal consolidation programme to an end. In other words, the increased political uncertainty had an obvious impact on the central bank meeting this time. Moreover, there are also two other important remarks made at NBH President’s press conference that deserve attention. Firstly, Jarai said that the Council was still not sure whether it would be able to hit the 2008 inflation target even with the current rates. Secondly, in respect to the doubts mentioned above, Jarai expressed his disillusion over the fact that the forint has not strengthened significantly so far in spite of the monetary tightening.

Our comment: Jarai’s comments plus information that accompanied Monday’s decision of the Monetary Council makes us reconsider our short-term outlook for the NBH base rate. The Council is evidently afraid that the medium-term inflation outlook is still not under control. Thus it seems that, until the forint starts to appreciate significantly in a sustainable way and the fiscal restriction is really being implemented, the central bank is going to take a clearly hawkish approach. This means that more hikes in the base rate are probably ahead of us. In our view the official rate should thus land at 8.50 (eventually at 8.75%) at the end of the year.