By Tamas Csonka in Budapest
The Monetary Council of the Hungarian National Bank (MNB) cut the base rate by 25bp to 7.0% with a unanimous vote on June 18, in line with forecasts, but its forward guidance signals the possibility of a temporary pause in the rate-cut cycle in the coming months. The MNB lowered its inflation forecast by 0.5pp to 3.0% in its quarterly macro update, while keeping the GDP outlook unchanged.
The symmetric interest rate corridor was lowered by 25bp, bringing the O/N deposit rate to 6.0% and the O/N collateralised loan rate to 8.0%.
The 25bp cut is the lowest since the MNB began its easing cycle in May 2023.
Policymakers pointed to the country’s improving risk perception, supported by the recovery of growth, historically high foreign exchange reserves, the persistent improvement in the current account balance and a cautious monetary policy
The volatile financial market environment, significant geopolitical tensions and the risks to the outlook for inflation continue to warrant a careful and patient approach, they added.
At a press conference after the meeting, deputy governor Barnabas Virag said the 25bp cut was the only option weighed at the meeting and the vote was unanimous. He noted that the base rate had reached the top of the 6.75-7.0% range for mid-year, communicated earlier.
Global investor sentiment has deteriorated amidst significant turbulence, while volatility in European markets increased following the elections for the European Parliament. He said room for manouevre of monetary policy in the second half would be narrow as US interest rates may be higher for a prolonged period.
On macro issues, Virag said Hungary's headline CPI is expected to fluctuate close to the upper bound of the central bank's 4% tolerance band in the coming months, The decline in core inflation will come to a halt in H2 and core inflation will rise close to 5.0% by the end of the year.
The gradual expansion of the economy will be mainly supported by the strengthening of domestic demand, spurred by strong real wage growth.
The MNB aims to quickly lower inflation expectations to aid economic recovery. The household credit market has started to recover, while the corporate sector remains cautious.
The pick-up in domestic lending can be supported by a monetary policy that focuses on lowering interest rates across the entire yield curve, in the longer end as well, he asserted.
The MNB’s deputy governor has also stressed that there are inflationary pressures from repricing of market services and strong wage growth.
The main message of Virag's statement however was that from June, a 'new phase'in the MNB's easing policy will follow.
He recalled the change in the wording of the MNB’s forward guidance, which suggests that rate-setters will make a pause in the easing, and the level of the base rate will be decided 'based on incoming data from month to month'.
The MNB said the council is constantly assessing incoming macroeconomic data, the outlook for inflation and developments in the risk environment, based on which it will take decisions on the level of the base rate in a cautious and data-driven manner.
This is in contrast with the previous guidance, which highlighted the possibility of 'further reduction in the base rate in a cautious and data-driven manner'.
When asked about the change in the forward guidance, Virag said the MNB weighted two factors with the opposite impact: the favourable inflationary path and a deteriorating investor sentiment.
Virag did not comment on the recent weakening of the forint and confirmed that the MNB's primary objective is to achieve sustainable price stability. At present, all monetary developments have a larger inflationary impact and monetary policy should be adjusted accordingly, he said.
The EUR/HUF moved lower after the MNB's decision to 394 after trading at 397 earlier in the day.
The MNB also issued the main figures of its quarterly inflationary report to be released on Thursday. It lowered the inflation outlook for 2024 from 3.5-5.0% in March to 3.0-4.5% and left its GDP growth forecast unchanged at 2.0-3.0%. The central bank predicts an average annual inflation of 2.5-3.5% and growth ranging from 3.5% to 4.5% for 2025, the same as in the previous report.
For 2026, MNB expects inflation to be in the range of 2.5-3.5% and GDP growth between 3-4%. The new baseline projection is generally surrounded by upside risks to inflation and downside risks to economic growth, Virag noted.
A survey by financial website Portfolio showed analysts projected the base rate to drop to 6.5% by the end of the year.
Makronom Institute stressed that in its data-driven stance, the MNB will pay more attention to developments in the financial market. The start of monetary easing in the US could again increase the scope for the Hungarian central bank.
The MNB could continue its rate-cutting cycle if there is a doveish shift in the regional monetary policy outlook and/or a material improvement in the global risk sentiment, ING Bank analyst Peter Virovacz commented.
