GKI: Why should the MNB fight inflation with high interest rates?

By: Trademagazin Date: 2023. 05. 25. 12:24

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The shocking rise in consumer prices last year and the expected peak this year raises the question of whether the MNB is doing the right thing by protecting itself against price rises with high interest rates, or should it rather focus on accelerating growth? For a long time, monetary policy favored growth, itself contributing to excess demand (growth loan programs, weak HUF). However, the accelerating price increase returned the central bank to its traditional territory of protecting the forint.

In 2021-22, the monetary policy of the MNB tried to curb demand on a broad basis, and when these did not succeed, it resorted to the weapon of raising interest rates. This has several advantages in terms of curbing demand. On the one hand, it reduces overconsumption by making borrowing more expensive, and on the other hand, high interest rates also encourage savings, which contributes to a part of the demand being realized later.

The monthly evolution of the consumer price index and the nominal effective exchange rate, 2007-2023, successfully reached the weapon of interest rate hikes. This has several advantages in terms of curbing demand. On the one hand, it reduces overconsumption by making borrowing more expensive, and on the other hand, high interest rates also encourage savings, which contributes to a part of the demand being realized later.