Monetary Policy Analysis with a Quarterly Projection Model: Hungary

Selected Issues Papers, August 13, 2024

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The calibration of monetary policy is particularly challenging at a time of large shocks.
Interest rates in Hungary rose sharply in response a significant increase in inflation and depreciation in the forint in 2022.
As inflationary pressures have eased, the base rate has been reduced but remains restrictive.
Balancing the risks of loosening too quickly and inflation taking longer to return to target against those of loosening too slowly with larger costs to output requires careful calibration.
This paper uses a Quarterly Projection Model to provide a quantitative guide to the calibration of monetary policy in Hungary.
As underlying inflation remains elevated and second-round effects continue to push up services inflation, the model suggests that further cuts in interest rates should proceed cautiously and gradually.

Interest rates increased sharply in 2022 in response to inflation and forint depreciation.
The base rate has been reduced as inflationary pressures eased but continues to be restrictive.
Underlying inflation remains elevated.
Second-round effects are continuing to push up services inflation.
The Quarterly Projection Model provides quantitative guidance for calibrating monetary policy under these conditions.

Proceed cautiously and gradually with further cuts in interest rates.
Carefully balance:
- The risk of loosening too quickly, which could delay the return of inflation to target.
- The risk of loosening too slowly, which could impose larger costs on output.

Monetary Policy Analysis with A Quarterly Projection Model
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