News & Analysis

The National Bank of Hungary raised its base rate by another 15bps today to reach 1.80%, as expected, but the Hungarian Forint still weakened against the US dollar following the announcement. Going into the event, odds for a more aggressive hike than the consensus of 15bps were elevated given the board’s sensitivity to rising inflationary pressures, arguably explaining the move in HUF upon the announcement.

 

HUF hands in gains despite 15bp rate hike by NBH 

 

CPI inflation printed similar to expectations in September at 5.5% YoY, up from 4.9% in August, but it continued to outpace not only the NBH 4-percent upper tolerance band but also the central bank’s own expectations.

This was mostly driven by higher food and commodity prices, as oil prices are constantly reaching new highs. Markets may had been gearing up for an upward surprise to what the median of forecasters in the Bloomberg survey foresaw, as expectations for inflation remain high.

Inflation is expected to last until at least the end of 2021, while next year’s inflation could be supported by the sharp 20% increase in minimum wage and a potential hike in public sector wages. This means it could take longer for inflation to convert down to the NBH’s 3% target than initially thought.

Policymakers at the NBH had mentioned at different occasions they aim to slow down the pace of the tightening cycle until the end of the year, but with risks around price pressures remaining plentiful, the NBH’s strategy may be put to the test. This is especially the case given fiscal policy is likely to remain pro-inflationary at least until elections early next year, which only makes it more difficult for the central bank to slow down its tightening cycle without posing risks to the currency and inflation outlook.

 

Author: Ima Sammani, FX Market Analyst

 

 

Disclaimer
This information has been prepared by Monex Europe Limited, an execution-only service provider. The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. No opinion given in the material constitutes a recommendation by Monex Europe Limited or the author that any particular transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, it is not subject to any prohibition on dealing ahead of the dissemination of investment research and as such is considered to be a marketing communication.