Hungary to Hike Rates as Governor Flags Risks: Decision Guide

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Hungary is set to become the first European Union nation to tighten monetary policy this year, with the central bank widely expected to raise borrowing costs in an attempt to curb surging inflation.

Policy makers led by Governor Gyorgy Matolcsy will likely raise the benchmark rate for the first time in a decade on Tuesday to 0.9%, according to a Bloomberg survey. The decision will follow weeks of speculation over the size and pace of the central bank’s actions to come, with a split among economists and money-market traders leading to wild swings in the forint.

While Deputy Governor Barnabas Virag has spoken of a “decisive” tightening move, rate-setter Gyula Pleschinger said hikes should take into account the fragility of the economy and would likely happen only once a quarter.

In a sign of the stakes, and potentially to underline a commitment to break with years of ultra-loose monetary policy, Matolcsy said Monday that Hungary risks a speculative attack without action. He said an election-year 2022 budget that’s poised to fan inflation combined with negative real interest rates are a potentially combustible mix.

“The uncertainty is on how big of a hike and what the path might look like,” Morgan Stanley economists including Georgi Deyanov wrote in a report before the rate decision. “If the NBH disappoints on how hawkish the outlook is, then the curve can steepen and the forint might come under pressure.”

Hungary’s central bank may raise the benchmark rate by 30 basis points in a first step, according to the survey. Many economists also expect the one-week deposit rate, which is set on Thursdays and is now at 0.75%, to be aligned with the base rate. The central bank may also phase out some stimulus programs.

Policy makers in Budapest won’t be alone for long in the EU in embarking on tightening, especially after the U.S. Federal Reserve Reserve also showed signs of pivoting toward taking a more hawkish stance.

The Czech Republic may raise its base rate as soon as on Wednesday. Ukraine, Hungary’s non-EU eastern neighbor, has tightened policy twice since March and Russia raised rates this month for a third straight meeting. Poland, meanwhile, is looking to buck the trend and avoid raising rates for now.

Meanwhile money-market traders expect the three-month Budapest interbank rate -- a widely-used gauge for the prevailing interest rate in the economy -- to rise by more than 50 basis points by September from the current 0.93%, which is already 33 basis points higher than the base rate and underlines the scope of rate-hike bets.

The cloudy rate-path outlook has added to volatility in the forint, which has gone from the second-best performing emerging-market currency in May -- when it rose 3.7% against the euro -- to the worst, with a 1.8% drop so far in June.

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