The MNB increases the prime interest rate

As expected, the Monetary Council of the National Bank of Hungary has increased the prime interest rate from 1,2 to 1,5. The MNB promised in advance that a raise is likely, which was not at all shocking, as on account of the previous two months’ interest rate raise, inflation had decreased (but is still well above what the Central Bank desires).

The prime interest rate has been increased by 30 basis points, to 1,5 percent. The rest of the determining interest rates grew the same amount. The interest of the overnight deposit grew from 0,25 to 0,55 percent (two months ago, it was in the negative), the overnight and one week guaranteed loan also changed, from 2,15 to 2,45 percent.

The expectations of analytics were clear for this decision, the 1,5 interest was taken for granted, anything else would have been a surprise. There was a 30 basis point increase in June and July, from the previous 0,6 to 0,9 percent, and then the interest rate was raised to 1,2 percent. A similar step was anticipated now, too.
At the beginning of June, the leaders of the MNB announced a monetary tightening to be next. The statement was made minutes after it turned out, that in May, inflation was at 5,1 percent, higher than it’s ever been, since October of 2012. Then, the increase of prime interest rate in June did not do much. Since it was only done eight days before the end of the month, it is no wonder it did not work so soon. What came unexpectedly, however, was the growth of inflation, to 5,3 percent.
Thus, there came a new increase. The Central Bank’s severity slowed down the surge in prices, but unfortunately, only to managed to get it to 4,6 percent. The official inflation target of the MNB is 3, plus minus 1 percent.

As claimed by Görgy Matolcsy, president of the MNB, a monthly increase in the prime rate is to be expected until the desired percentage is achieved. Of course, only after calculating whether it would be worth it to do so or not. Barnabás Virág said not long after, that July’s decision will be the marker beacon for the determination of the amount to be raised.

The 0,3 percent increase in prime interest rate tells us, the MNB sees, we are far from the target inflation but believes, we are on the right path and there is no need to change the rapidity of the aggravation.

At three o’clock in the afternoon, their reasoning was made public. This included, among others, the following message:
„The MNB decided to start gradually derecognizing the sovereign debt purchase program. As the first step, from this week onward spendings will be reduced to 50 billion forints from the previous 60 billion but underlined that they could differ from it sometimes. At the end of each quarter, starting in September, new decisions shall be made regarding the matter.”

„The inflation was not as high in July as in the previous months, but this deceleration can mostly be tied to the base effects” – states the analysis of the MNB. It was also observed, how the price index of the market services did not grow more, which indicates, the majority of pricing connected to re-opening has already happened.
As a consequence of the base effects, the National Bank of Hungary expects inflation to grow temporarily by Autumn. On the report of the MNB, by the end of the year, it will have got outside of the tolerated 2-4 percent, and only by the beginning of 2022, will it return to the aforementioned bearable percentage. Finally, by the middle of 2022, if everything goes according to plan, it will have stabilized to about 3 percent.