This move made Hungary the country with the highest base interest rate in the European Union. According to forecasts, most economists expected a rate increase of only 0.5%.
By tightening monetary policy, Hungary’s central bank is reacting, like other central banks around the world, too high inflation as well as to the depreciation of the domestic currency. The Hungarian forint fell to a record low against the euro on Monday but strengthened after today’s news of a surprisingly sharp interest rate hike.
The bank today made the most significant increase in its key interest rate since October 2008. At that time, it raised the base rate by 3% in response to the negative effects of the then global financial crisis.
The bank is very concerned about inflation
According to analyst Joseph Marlow of Capital Economics, today’s interest rate hike shows that the central bank is now much more concerned about rising inflation and the weak forint. He also said.
“We think further interest rate hikes are likely.”
Hungary’s annual inflation rate climbed to 10.7% in May from 9.5% in April, according to preliminary data from the local statistics office. Economists expect average inflation to reach 10.25% for the whole of this year, a 24-year high.
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Hungary has thus replaced the Czech Republic as the top interest rate riser, which last week raised its base rate by 1.25% to 7%. However, the Czech Republic is even further ahead in inflation than Hungary, recording official inflation of 16% in May.
Both the US Fed and the European ECB are still likely to raise their rates at their next meetings, which means this uncomfortable situation for many businesses and families will be with us for some time to come.