The Central Bank (CB) of Hungary raised its key interest rate by a record 185 basis points to 7.75 percent – a sudden move by a European country to combat unprecedented price increases, Bloomberg reports. The change in the rate level was the largest since 2008, when Hungary was hit hard by the financial crisis, which left the country in recession for two years.
Bloomberg notes that such an increase in the key rate was unexpected, since the agency had previously predicted a change of only 50 basis points. As a result, the measure exceeded analysts’ expectations by more than three times.
Another reason for the increase in the key rate, in addition to price stabilization, was the weakening of the forint. On June 27, the exchange rate of the national currency against the euro fell sharply and in mid-June for the first time fell to 400 forints per euro. Against the backdrop of a sharp change in the rate, the national currency was able to strengthen by more than one percent. The Central Bank is likely to continue to rapidly raise rates, Marek Drimal, an expert at Societe Generale strategist, predicted.
The fall in the currency can be explained by tension in international markets, which was caused by inflationary fears against the backdrop of Russia’s special operation in Ukraine. In addition, the aggravated situation is caused by concerns about delays in financing Hungary from the European Union. Previously, the EU refused to approve the allocation of funds to the country due to political motives.
In the current situation, when European countries seek to completely abandon trade with Russia and continue to impose new sanctions due to the country’s military actions in Ukraine, Hungary has a special position. The state is highly dependent on energy imports from Moscow, therefore it calls on the EU countries to stop imposing sanctions against Russia.