(Bloomberg) — Hungary raised the required reserve rate less than expected in a move signaling further monetary tightening for one of the most hawkish central banks in Europe. The forint pared gains against the euro.
Policy makers increased the rate by 30 basis points to 2.4%, less than the 40 basis points that was the median estimate in a Bloomberg survey. It also increased the low-end of the interest-rate corridor by 80 basis points to 2.4% and the high-end by 30 basis points to 4.4%, reinforcing the upward trajectory of interest rates.
Deputy Governor Barnabas Virag is scheduled to hold a briefing at 3 p.m. in Budapest as the bank publishes new inflation forecasts.
The central bank has pledged to follow the increases in the reserve rate, which is set monthly, with hikes in the one-week deposit facility. The latter has become the effective base rate after a cumulative 150 basis points in hikes to 3.3% over the past month.
The rate on the one-week facility, where commercial banks park most of their central bank deposits, is set each Thursday.
Policy makers have delivered six interest-rate hikes over the past month, including four in the one-week rate, in the face of surging inflation and a ballooning budget deficit that Governor Gyorgy Matolcsy has said posed a risk to the country’s financial stability.
The monetary tightening campaign has failed to significantly strengthen the forint, which fell to a record against the euro in November. The currency pared gains after the rate decision and traded at 366.8 per euro, just 1.4% stronger than the record low reached on Nov. 23.
In another nod to tightening, the central bank may also announce later Tuesday the end of its program of purchasing government bonds on the secondary market. It would follow months of tapering, with the central bank lowering its purchased amount to 20 billion forint ($55 million) last week, half of its weekly target.
Prime Minister Viktor Orban, who has ramped up spending before next spring’s elections, has also signaled a shift in fiscal strategy recently, including by bolstering budget reserves and delaying the planned $5 billion purchase of Budapest Airport.
(Updates with forint reaction in first and seventh paragraph, rate corridor in second.)
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