By Gergely Szakacs and Jason Hovet
BUDAPEST (Reuters) – The National Bank of Hungary (NBH) left interest rates unchanged on Tuesday, as expected, and said it would tighten liquidity conditions further, defying government pressure to cut borrowing costs amid a sharp economic slowdown.
Prime Minister Viktor Orban’s top economic aide piled pressure on the central bank shortly before the meeting to start lowering interest rates, saying current levels were “extremely onerous” for the economy.
The decision to leave the European Union’s highest benchmark steady at 13%, seen by some economists as a test of the central bank’s independence, was in line with the unanimous call of analysts in a Reuters poll last week.
The NBH also left its overnight deposit rate unchanged at 12.5% and its quick deposit rate at 18% at a daily tender of the facility it uses to tackle market risks earlier on Tuesday.
“We still need the 18% one-day deposit rate to break down inflation,” Deputy Governor Barnabas Virag told a briefing, adding that changing the base rate was not on the agenda as the NBH focused on long-term improvements in risk assessment.
“The NBH will further tighten the impact of the required reserves on liquidity,” he said. “Looking forward, liquidity management remains a priority so that we can keep monetary conditions in a sufficiently tight range.”
To encourage greater utilisation, the NBH said optional reserves would be remunerated at the overnight quick deposit tender rate, currently at 18%, instead of the 13% base rate.
The bank said inflation had probably peaked in January, but warned disinflation could be slow. Higher core market interest rates also presented further possible risks, Virag said.
At 1432 GMT, the forint traded at 377.7 versus the euro, stronger than 378.7 before the rate decision announcement and near nine-month highs hit this week.
Markets expect rate cuts to start sometime in the second or the third quarter, once inflation starts retreating.
“Our current view is that policymakers will only feel comfortable to begin cutting the base rate from September this year, at which point inflation is likely to be around half its current level,” Capital Economics emerging Europe economist Nicholas Farr said in a note.
Economists polled by Reuters see room for cuts in the base rate of up to 250 basis points by the end of the year amid an expected fall in inflation to single digits from over 25% in January. Even so, they see 2023 inflation running at 18.5%.
“MEAT PRICES FOR VEGETABLES”
Like other policymakers in central Europe, Hungarian rate setters are seeking to keep rate policy stable for now as the economy slows due to the fallout from the war in neighbouring Ukraine. Orban’s government expects growth to slow to 1.5% this year from 4.6% in 2022.
“I can only hope that the NBH starts lowering interest rates as soon as possible and will not remain overly cautious,” Economic Development Minister Marton Nagy, a former central bank deputy governor, was quoted as saying by news website index.hu.
“The 18% nominal interest rate and the current 5-7% real interest rates are extremely onerous for the economy,” Nagy said. “Unfortunately, for now, there is no sign of easing. Moreover, monetary conditions are being tightened.”
The European Commission forecasts Hungarian inflation at 16.4% in 2023, the highest in the EU. Food price inflation was an eye-watering 48.2% year-on-year in January, more than double the EU average, squeezing ordinary Hungarians.
The NBH said food inflation had peaked in January, but services inflation remained higher than usual and would need to be monitored over the coming months.
“Prices have not doubled, but tripled or quadrupled,” pensioner Magda Nyeste said on Tuesday while shopping for groceries in a market hall on the outskirts of Budapest.
“You just need to look at the price tags. They are charging meat prices for vegetables.”
(Additional reporting by Krisztina Fenyo; Editing by Andrew Heavens, Nick Macfie and Christina Fincher)
