Hungary needs double-digit interest rates to curb inflation -central banker

Despite the risk of a global recession in the autumn due to surging energy prices, rising interest rates and high debt levels, Virag said Hungary's central bank should continue tightening and use all tools to prevent inflation taking on a life of its own. "The air is filled with gunpowder to a degree that these factors can compound very easily," Virag told private broadcaster InfoRadio, referring to the risk of a global downturn in the months ahead.

Hungary needs double-digit interest rates to curb surging inflation and monetary tightening needs to continue at least until the pace of price growth starts declining, central bank Deputy Governor Barnabas Virag said on Wednesday. Inflation has been accelerating across Central Europe since Russia's invasion of Ukraine amplified already strong price pressures following the coronavirus pandemic, prompting central banks to hike rates sharply.

Last month the National Bank of Hungary raised its base rate by 100 basis points to 10.75%, taking borrowing costs into double-digit territory for the first time since late 2008, and flagged more rate hikes to come. Despite the risk of a global recession in the autumn due to surging energy prices, rising interest rates and high debt levels, Virag said Hungary's central bank should continue tightening and use all tools to prevent inflation taking on a life of its own.

"The air is filled with gunpowder to a degree that these factors can compound very easily," Virag told private broadcaster InfoRadio, referring to the risk of a global downturn in the months ahead. Citing the example of the 1970s, however, when Virag said policy makers slowed policy tightening at the first sign of causing a recession, he said "determined tightening" was needed even in the later stages of the fight against inflation.

Hungarian core inflation surged to a 25-year-high in July and headline inflation exceeded market expectations despite government price controls, piling pressure on the Hungarian central bank to raise interest rates further. Virag said a lengthy period of drought could push Hungarian food prices higher still, compounding inflationary pressures, with energy prices posing further upside risks.

That means inflation could peak later and at a higher level - around 18% to 19% - than previously expected, and start declining only from next year at a slow pace, Virag said.