How long will the MNB keep up the tight monetary policy in 2023?
Last week the Hungarian National Bank (MNB) held a press conference about economic expectations in Q1 2023 and the measures it is taking to counter inflation and moderate foreign exchange rates. They are continuing the implementation of a tight monetary policy until more encouraging economic trends are detected.
Some things stay the same
MNB tightened its monetary policy significantly last October, and the measures introduced to stabilize Hungarian inflation and foreign exchange rates will remain in place for now:
- MNB base rate: 13%
- Effective marginal interest rate: 18%
- Regular overnight deposit rate: 12.5%
- Overnight repo rate: 25%
At the same time, MNB will continue to use one-day deposit quick tenders and FX swap transactions to ensure financial market stability. Moreover, it will also continue to meet foreign currency liquidity needs in the coming months to reach market balance related to the energy account.
New measures to be implemented
To give more flexibility to market players, the long-term deposit facility continues with some tweaks, changing from a two-month to a one-month term tool as of 25 January. In a similar vein, discount bill auctions will be held weekly as of 1 February.
As of 1 April 2023, the required reserve ratio at Hungarian banks, which they need to meet daily, will increase from 5% to 10%. As a result, another HUF 2,000 billion will be pushed from the one-day quick deposit to reserves at the beginning of Q2 2023. This will improve the effectiveness of the liquidity tightening mandate.
Economic trends in the EU and Hungary
MNB intends to keep up its strict monetary policy until there is an observable, established improvement in monetary trends. While some improvement is visible already compared to last year, actual stabilization (and with it, the relaxation of the monetary policy) is not really expected before H2 2023, even as effects decreasing inflation should strengthen over the coming months.
Currently, the main trend in both Europe and Hungary is that economic growth is slowing down. This is mostly due to how the purchase power of salaries is decreasing, creating a decrease in demand as well. At the same time, export capacities are increasing, which can contribute to the improvement of Hungary’s foreign trade balance.
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