WOOD Flash – Hungary macro: twisting policies helps, but may not resolve the issues

The Monetary Policy Council of the Central Bank of Hungary (MNB) raised the policy rate by 125bp to 13.00%, at its meeting on 27 September. The decision was in line with our expectations but higher than the 100bp hike that consensus was anticipating. Importantly, the bank has called an end to its hiking cycle via the policy rate, and has announced its intention to shift the focus onto tightening liquidity and enhancing monetary transmissions. The MNB has finetuned its projections, but the MPC noted that the balance of risk for inflation in the new estimates is symmetrical, rather than upwards, as it was the case in recent quarters. We assess the decision of the MPC as appropriate, but reiterate that, ultimately, the key ingredient that would differentiate a path back towards sustained low inflation and financial prosperity, vs. one of high financial instability, rests with the government: its genuine desire to fulfil its obligations towards the EU principles and reining in, to some extent, its thirst for economic growth. Evidence continues to mount supporting the first scenario, but it has not yet reached critical mass for us to signal a genuine benign outlook.