BUDAPEST, Hungary (Reuters) -At a tender on Thursday, Hungary’s central bank raised the rate for a one-week deposit by 50 basis points (bps) to 7.75%. It did this because it raised its forecast for tax-adjusted core inflation, which is its preferred measure of long-term price trends, to an eye-popping 13%-14% this year.
On Tuesday, the National Bank of Hungary (NBH) raised its base rate by 185 basis points, bringing it to 7.75 percent. This was the biggest rate increase since the beginning of the global financial crisis in 2008, and it was done to help the currency.
On Thursday, it followed up that increase with a 50-bps increase in the rate for a one-week deposit. This is the facility it uses to deal with short-term volatility in the financial markets. This brought the difference between the two rates closer to what it had promised before.
The NBH raised its tax-adjusted core inflation forecast for 2022 from 7.9% to 9.4% just three months ago. It now expects inflation to drop to 6.6% to 8.2% next year, which is still much higher than the policy goal range of 2% to 4%.
The NBH also predicts that private sector gross wage growth will be between 13.2% and 13.8% this year and between 8.8% and 9.9% next year. The NBH said this could put more upward pressure on inflation.
“Since there is a lot of competition for skilled workers in all sectors, wage growth is likely to stay strong,” it said. “This raises the chance that underlying inflation will rise.”
Barnabas Virag, who is the bank’s deputy governor, said that the bank needed “every percentage point and basis point” to reach its inflation goal of 3 percent, which is expected to happen in 2024.
The bank increased its 2022 inflation forecast from 7.5 to 9.8 percent to 11 to 12.6 percent. It also raised its inflation forecast for 2023, even though the government has put price caps on fuels, basic foods, and energy bills for homes.
The NBH has also promised more and more decisive rate hikes, saying that it was most important to stop second-round inflation effects and set expectations.
“We now expect the NBH to raise its base rate to 10% by the end of the third quarter of 2022, up from 8.90% previously,” Morgan Stanley (NYSE: MS) said in a note.
The forint, which fell to a record low of 404.50 against the euro on Monday, was helped by the bigger-than-expected rate hike on Tuesday. By Thursday, the currency had strengthened to 395, which took away some of its gains.