Hungary Starts Tightening Countdown as Price Pressures Intensify

(Bloomberg) -- Hungary’s central bank is on the verge of abandoning ultra-loose monetary policy just as its peers are putting the brakes on tightening.

While central banks from London to Prague raised borrowing costs last year to combat inflation, policy makers in Budapest stuck to unconventional tools and record-low interest rates to help boost lending and stimulate economic growth. They’ll probably keep that mix unchanged at a meeting on Tuesday, with analysts betting on a gradual unwinding of easing measures starting in March.

"Hungary’s economy has reached a point where policy makers are willing to start to gradually withdraw monetary stimulus," said Marcin Kujawski, an economist at Nomura International Plc in London.

The shift toward a hawkish message may be at odds with a continent that’s facing slower growth and inflation. The European Central Bank said last week that risks to the economic outlook had moved to the downside. Czech rate setters, who hiked borrowing costs five times in 2018, have also shifted to a more cautious approach, while Poland sees its benchmark staying at a record low possibly until 2020.

But in Hungary, the tight labor market is pushing up wages, which in turn is leading to consumers spending more and helping drive price growth. Earlier this month, Deputy Governor Marton Nagy said core inflation excluding the effect of indirect taxes, policy makers’ favored measure for long-term inflation, could exceed 3 percent sometime in the first three months of the year, which would be a strong signal that tightening was needed.

The first step to cool the economy would be the unwinding of unconventional easing measures that have pushed interbank rates below the benchmark rate, now at 0.9 percent.

Most analysts expect the central bank to start reducing the volume of foreign-currency swaps -- used to inject forint liquidity into the economy -- starting in March. They are more divided on whether the Monetary Council will raise overnight rates that month or only later.

"The National Bank of Hungary means business," said Peter Virovacz, an economist at ING Group NV in Budapest. Further increases in the core inflation gauge should give the central bank a green light to start normalizing Bubor rates in March, he said.

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