(Bloomberg) — Hungary said it would continue a cycle of interest rate hikes and shut down its quantitative-easing programs, removing brakes on one of the most aggressive monetary tightening campaigns in Europe.
The forint extended gains against the euro after the central bank said it has ended its programs for buying corporate and government bonds following a meeting on Tuesday. Deputy Governor Barnabas Virag said the tightening campaign would be “long” and extend into 2022.
Earlier, policy makers raised the required reserve 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.
The central bank has pledged to follow increases in the reserve rate, the nominal base 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. It will rise by 30 basis points to 3.6% on Thursday, Virag said.
As Virag spoke, the central bank published a new inflation forecast, raising its outlook for next year to a range of 4.7% to 5.1%, from 3.4% to 3.8% earlier.
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 extended gains after the central bank’s hawkish statement, rising 0.5% against the euro to 365.82 by 3:21 p.m. in Budapest. The currency is just 1.7% stronger than the record low reached on Nov. 23.
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.
While it’s shutting down its quantitative easing programs, the central bank said it doesn’t rule out “targeted and temporary” government bond purchases if necessary.
