WOOD Flash – Hungary macro: MPC delivers strong hike, with hawkish reinforcement

At its meeting yesterday (27 July), the Monetary Policy Council at the MNB decided to raise interest rates by 30bps. The base rate was raised to 1.20% and, at the same time, a symmetric (+/-0.95ppts) interest rate corridor was reinstated, by raising the O/N collateralised lending rate to 2.15% and the O/N deposit rate to 0.25%. With yesterday’s move, the deposit rate has been raised, back to positive territory, for the first time since 2016. The magnitude of yesterday’s increase was higher than both our expectations and the consensus, which was expecting a 20bps rise. In essence, in our view, the decision was the further reinforcement of the hawkish stance adopted in June, as the MPC now expects to deliver firm interest rate hikes on a monthly basis, to prevent the second-round inflationary effect, in contrast to the more cautious and data-driven approach suggested in June. Judging from the MPC’s tone, we believe that it will deliver further rate hikes of a similar magnitude in the coming months. Therefore, we have revised our year-end policy rate forecasts upwards, to 2.25%, for this year, with some further upside risk, and to 2.75% for end-2022E.