Page 27 - CE Outlook Regions 2023

2.3.3 Inflation and monetary policy

The National Bank was one of the first central banks in the region to
start a monetary tightening cycle in June 2021, lifting rates from a
record low of 0.6%. Policymakers raised the base rate in 2022 from
2.4% to 13% with 10 rate hikes.

The MNB closed its tightening cycle with a 125bp rate hike in
September, saying that conditions were sufficiently strict to ensure
meeting the inflation target, adding that "there is no sense in raising
rates further". The news came after the MNB revised its inflationary
forecast upward from 11-12.6% to 13.5-14.5% for 2022, and from
6.8-9.2% to 11.5-14% for 2023.

The forint weakened more than 5% following the September rate
decision, leading to an intense sell-off of the forint, one of the weakest
European currencies in 2022, forcing the MNB to intervene with the
launch of the one-day deposit facility at 18%, which has become the
reference lending rate. The 5pp daily hike was the largest ever one-day
rate hike by the central bank. The move helped to contain the slide of
the forint, after the EUR/HUF hit 434 and USD/HUF slid to over 450.

Such missteps by the central bank have raised concerns about the
MNB’s credibility. Analysts argued that government intervention in the
market in the form of price caps and freezing lending rates have also
weakened the effectiveness of monetary transmission.

In the autumn, the MNB discontinued government bond purchases and
other crisis management programmes and tightened monetary
conditions by absorbing liquidity through higher reserve requirements
and the introduction of longer instruments.

Hungary’s headline inflation rate spiked from 2.7% in January to a
26-year high of 22.5% in November, core inflation in the same period
rose from 4.2% to 24%, at the fastest pace in the EU, while food prices
rose 43.8% y/y in November, the highest among the EU-27.

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