# Hungary ramps up rate hikes as war stokes inflation risks
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-03-22
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Hungary's National Bank Hikes Interest Rates Amid
Meta Description: Find out the effects of energy costs and the Ukraine war on inflation, and what it means for economic growth and interest rates in Hungary.
URL: https://financedigest.com/hungary-ramps-up-rate-hikes-as-war-stokes-inflation-riskshtml

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By Gergely Szakacs and Krisztina Than

BUDAPEST (Reuters) – The National Bank of Hungary raised its base rate by 100 basis points to 4.4% on Tuesday, the biggest hike in the rate since 2008, saying rising energy costs and the war in Ukraine had fuelled inflation risks.

The bank, which raised its inflation forecasts for both 2022 and 2023, said average inflation could rise to 7.5%-9.8% this year and inflation would come back to the bank’s 3% target only in the first half of 2024.

Economic growth will likely be slower than expected this year with the war hitting growth directly through disruption to international supply chains and [trade channels and through rising commodity](https://www.financedigest.com/a-brits-guide-to-understanding-commodity-trading.html "A Brit’s Guide to Understanding Commodity Trading") prices, it added.

The Russia-Ukraine war has posed a much higher risk than usual to the [outlook for inflation](https://www.financedigest.com/britains-next-sees-lower-clothing-inflation-shares-dip-on-cautious-outlook.html "Britain’s Next sees lower clothing inflation, shares dip on cautious outlook"). The increase in [inflation risks warrants a further tightening](https://www.financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continue.html "Inflation trumps financial risks as central bank tightening set to continue") of monetary conditions,” the Monetary Council said in a statement.

The rate increase was bigger than analysts’ median forecast for a 75 bps [hike in both its base rate](https://www.financedigest.com/stocks-falter-as-economic-worries-nag-nz-delivers-big-rate-hike.html "Stocks falter as economic worries nag, NZ delivers big rate hike") and the overnight deposit rate in a Reuters poll last week. The bank hiked all [interest rates](https://www.financedigest.com/hotel-investors-should-they-be-worried-about-a-potential-economic-pause-delving-into-inflation-interest-rates-recession-etc.html "‘Hotel Investors – should they be worried about a potential economic pause?’ delving into inflation, interest rates, recession etc") by 100 basis points.

The [bank said strong domestic demand may partly offset the adverse effects](https://www.financedigest.com/banking-turmoil-will-not-have-knock-on-effect-on-commodities-trafigura-cfo.html "Banking turmoil will not have knock-on effect on commodities -Trafigura CFO") of the Russia-Ukraine war on growth but exports are expected to make a smaller-than-expected contribution to GDP in 2022 because of supply chain disruptions.

Depending on the duration of the war and the policy of sanctions, [GDP is likely to expand at a slower rate](https://www.financedigest.com/hopes-of-slowdown-in-rate-hikes-bolster-shares-ahead-of-u-s-gdp.html "Hopes of slowdown in rate hikes bolster shares ahead of U.S. GDP") than expected, by 2.5%-4.5% percent in 2022,” the bank said.

Hungarian [headline inflation](https://www.financedigest.com/boes-mann-falling-headline-inflation-high-core-make-policy-difficult.html "BoE’s Mann: Falling headline inflation, high core, make policy difficult") continued its surge in February, hitting 8.3%, despite government-imposed price caps on some basic foods, fuel and energy.

Strong price pressures across Central Europe have been exacerbated by the [war in Ukraine](https://www.financedigest.com/euro-zone-economy-sentiment-rises-in-dec-first-time-since-start-of-ukraine-war.html "Euro zone economy sentiment rises in Dec, first time since start of Ukraine war"), which sent the region’s currencies — including the forint — to record lows versus the euro earlier this month.

The forint [firmed to 371.27 from 371.65 on the rate](https://www.financedigest.com/dollar-firms-after-u-s-labor-data-suggests-more-rate-hikes.html "Dollar firms after U.S. labor data suggests more rate hikes") announcement. It has recovered from [record lows](https://www.financedigest.com/credit-suisse-shares-hit-record-low-after-report-bank-is-looking-to-raise-cash.html "Credit Suisse shares hit record low after report bank is looking to raise cash") of 400 this month, helped by the NBH’s pledge that it would use all tools at its disposal to shore up the markets.

Analysts said the inflation risks clearly warranted further [rate hikes](https://www.financedigest.com/dollar-hits-one-month-high-against-yen-as-traders-bet-on-fed-rate-hike.html "Dollar hits one-month high against yen as traders bet on Fed rate hike").

We think that the recent deterioration in the inflation outlook argues in favour of further large [hikes,” Liam Peach at Capital Economics](https://www.financedigest.com/sp-warns-of-possible-economic-blow-hit-to-japan-inc-from-boj-rate-hike.html "S&P warns of possible economic blow, hit to Japan Inc from BOJ rate hike") said in a note.

We expect the base rate to [rise](https://www.financedigest.com/uk-inflation-rate-unexpectedly-rises-to-10-4-in-february.html "UK inflation rate unexpectedly rises to 10.4% in February") above 6% and short-term interest rates towards 8% in the coming months, but there’s a risk of rates rising more quickly if the forint suffers fresh large falls.

(Reporting by Gergely Szakacs and Krisztina Than; Editing by Raissa Kasolowsky and Alison Williams)


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