The Hungarian central bank raises the benchmark interest rate by 185 basis points

In Hungary, the central bank is making great efforts to chase away the specter of inflation. On Tuesday, the Monetary Council (Magyar Nemzeti Bank MNB) surprisingly raised the benchmark interest rate by 185 basis points to 7.75%. This is far more than observers expected and is now the highest key interest rate in the Visegrad region (Poland, Czech Republic, Slovakia and Hungary).

Michael Seiser

Business correspondent for Austria and Hungary based in Vienna.

All other interest rates in Hungary were also raised by 135 basis points. The market reacted with relief on the currency front. In the afternoon, less than 400 florins had to be paid for one euro. The national currency has come under increasing pressure in recent months. Earlier in the week, the exchange rate rose to a new all-time low of 404 forint against the euro. Price hikes are likely to be double-digit this year, despite price caps imposed by the national conservative government on basic food and fuel.

On the other hand, the monetary politicians had now sent a signal. The HUF could have come under immediate downward pressure if the MNB simply ignored expectations and raised rates by just 0.5 percentage points. The basic framework conditions are also unfavorable. Finally, there are steep wage increases to cope with the higher cost of living. This sets in motion a wage-price spiral.

Commerzbank believes that since inflation began accelerating early last year, central and eastern European central banks have implemented monetary tightening that is acceptable in absolute terms. But some real interest rates are now more negative than at the start of the tightening cycle, says Tatha Ghose, pointing out the difficulties in regaining a normal path. The weak forint forces the MNB to accelerate the interest rate carousel. Despite the price freeze measures, core inflation has already peaked in Europe because too much inflation is imported.

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