The National Bank of Hungary (NBH) has the European Union's highest base interest rate, at 13%. Last October, when the forint was plumbing new lows, it raised its overnight collateralised loan rate to 25% from 15.5%. The rate is the top of its corridor used to guide interbank markets toward the policy rate, setting limits on rate-setting. The bottom rate, used for overnight deposits, stands at 12.5%.
"TRIAL BALLOON" Last October, the bank also launched a new one-day deposit with an 18% interest rate, which over the past half-year has helped lift the forint from all-time lows of around 430 to the euro. The forint traded at 378.30 to the euro on Wednesday, down 1.84% on the day. Virag said the question of the 18% rate on the one-day deposit could be on the agenda only at subsequent monthly policy meetings. "A cautious approach, keeping market stability in mind, continues to be warranted in this issue," Virag said, referring to the 18% deposit rate.
Piotr Matys, senior FX analyst at In Touch Capital Markets, said that Virag's comments could be a way to test how markets will react to lower rates. "Lowering the upper end of the interest rate corridor would be a technical move -- like a trial balloon," he said. Morgan Stanley said it expected a cut in the top 25% rate to around 18-20% next week. The bank might ease more with cuts to the 18% one-day deposit rate beginning in June, it said. Hungary's headline annual inflation eased for a second straight month in March but only marginally, while its economy slipped 0.4% quarter-on-quarter to end 2022.
Prime Minister Viktor Orban's government has put pressure on
the central bank to start lowering borrowing costs to help a
recovery.
Central bank Governor Gyorgy Matolcsy and Finance Minister
Mihaly Varga held talks last week about ways to wrestle down
inflation and reduce borrowing costs.
(Reporting by Krisztina Than, additional reporting by Jason
Hovet and Alan Charlish; Editing by Robert Birsel, Kim Coghill
and Sharon Singleton)
