WOOD Flash – Hungary macro: MNB tightens liquidity, staying on hold

The Monetary Council at the MNB decided to keep the base rate unchanged, at 13.00%, at its meeting yesterday (24 January), in line with our expectations. A positive tone on the near-term inflation outlook was conveyed in the statement, but the overall message remained cautious. It was announced that the mandatory reserve ratio will double in April, to 10%, and the protracted use of other liquidity mopping measures was communicated. The decision to constrict liquidity further, in our view, is linked to the recent measures announced by the government, which hinder the monetary policy mechanism, especially the subsidised credit programme announced most recently, which aims to replace liquidity, as part of the MNB’s crisis-era FGS Go! programme comes due this year. Looking ahead, we still expect the reduction in the one-day deposit rate to begin in May, but we do not exclude the possibility of initial cuts as early as March, if inflation surprises persistently to the downside. Going forward, we expect to see the base rate reduced to 10% by the end of this year and to 7% by end-2024E.