Hungary: Central Bank pauses monetary policy easing in August
At its meeting on 27 August, the Monetary Council of the Hungarian Central Bank (MNB) decided to leave the base rate, the overnight deposit rate and the overnight collateralized lending rate unchanged at 6.75%, 5.75% and 7.75%, respectively. The decision marked the first pause in the Bank’s 15-month-long monetary policy easing cycle and was broadly in line with market expectations.
The MNB’s decision was chiefly influenced by rises in headline and core inflation in July plus a marked deterioration in global investor sentiment. Additionally, the Bank assessed that inflation will hover near the upper band of its target range in the remainder of 2024. Against this backdrop, the MNB stood pat to further reduce inflation expectations and ensure financial market stability. These concerns took precedence over stoking domestic economic activity, which stagnated in Q2.
The Bank indicated that it could consider “cautiously lowering interest rates further in the coming period, depending on the expected interest rate policies of the world’s leading central banks, as well as developments in the domestic inflation outlook and changes in Hungary’s risk perception.” Our Consensus is for about 50 basis points of additional rate cuts by year-end. That said, some panelists expect up to 100 basis points of cuts, while others see no more rate reductions this year. A weaker-than-expected forint and higher-than-anticipated domestic inflation pose upside risks to the base rate. The MNB is scheduled to convene next on 10 September.
ING analysts Peter Virovacz and David Szonyi commented on the outlook:
“The expected temporary decline in inflation in August and September along with the expected rate cuts by the Fed and the ECB will leave the door wide open for a 25bp cut if financial market stability (HUF stability) prevails. Thus, our base case for the NBH’s September decision is a 25bp easing. […] Looking further ahead, Deputy Governor Virág made it clear in response to a question that the year-end interest rate target remains unchanged (for now) at 6.25-6.50%. This leaves room for one or two more rate cuts later in the year.”
Goldman Sachs analysts Kevin Daly and Johan Allen said:
“Given our relatively dovish views on inflation, we continue to expect policy rates to decline by more than the MNB is guiding, but we acknowledge that external risks, in particular Forint volatility, continue to act as the ‘binding constraint’ on the pace of rate reduction.”