European bank shocks observers with huge rate hike - InterestRate.co.uk
huge rate hike

European bank shocks observers with huge rate hike

There have been shockwaves among economists after the Hungarian central bank hiked interest rates way beyond industry experts’ expectations. The National Bank of Hungary (NBH) increased the country’s base interest rate by a startling 185 basis points, taking it to 7.75%. This comes as the Hungarian currency, the forint, plummeted to record lows, and inflation continues to soar.

According to reports, economists had expected the central bank to increase the base rate by 50 basis points. The move has come as a shock to industry professionals and those who will now have to deal with the repercussions of soaring interest rates. Deputy Governor Barnabas Virag said that the bank had to take decisive action because of the weaker currency and inflationary pressures.

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Biggest hike since 2008 financial crisis

This massive interest rate hike marks the biggest since the start of the financial crisis in 2008 as the central bank continues with its monetary policy tightening in a bid to tackle inflation risks. During the financial crisis, the NBH took the unusual step of increasing the base rate by 300 basis points as an emergency measure.

In addition to this extraordinary rate hike, the central bank has raised its 2022 inflation forecast from 7.5% – 9.8% to 11% – 12.6% and also raised its 2023 projections. This comes even though the government has put price caps on household energy bills, food, and fuel.

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The government has set its inflation target at 3%, and it is thought Hungary could reach this in 2024. To try and reach this target, the bank raised the one-week rate from 7.25% to 7.75%, stating: “…due to the increased challenges, the Monetary Council considers it necessary to close the gap between the base rate and the one-week deposit rate.”

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A recent Reuters poll showed that while the expectation among economists had been for a 50-basis-point increase, a handful had predicted a rise of 100 basis points. However, the poll showed that nobody had expected the rate to be increased to this level. Furthermore, there are more interest rate hikes on the cards, which could see the interest rate rising to 9% or beyond in the near future.

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Joseph Marlow at Capital Economics said, “The decision by Hungary’s central bank (NBH) to raise its base rate by a much larger-than-expected 185bp today, to 7.75%, demonstrates that the NBH has now become much more concerned about rising inflation and the weakness in the forint. We think further hikes are likely, taking rates to at least 9% in the coming months.”

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