MNI POLICY: Financial Stability Key For Hungary's Central Bank

The National Bank of Hungary will be keen to cut rates as quickly as possible in a way consistent with the return of inflation to its 3% target in a timely manner, but financial stability will be a key consideration for monetary policy despite political pressure to ease more quickly, MNI understands.

With the country’s current account balance turning positive, a stable exchange rate and confirmation that the EU will pay out funds worth billions of euros to the government, investors might soon conclude that the BNB will continue with 75 basis-point cuts into the spring. At the moment expectations are for a slowdown to 50-basis-point reductions early next year.

But the MNB is likely to err on the side of caution, even though more dovish stances from the European Central Bank and the Federal Reserve would provide support for the forint and more cover for easier policy.

FISCAL UNCERTAINTY

The Bank will also be wary of the still unclear impact of fiscal policy, and alert to high levels of global uncertainty linked to events in the Middle East and the war in Ukraine.

Still, the Bank should also now be confident it can reach its 3% inflation target sustainably by 2025, given that underlying inflationary pressures are lower than previously expected. Last month deputy governor Barnabas Virag highlighted a "widespread and general decline in domestic inflation,” a fact confirmed by November’s larger than expected downturn in CPI and core inflation, which fell 2 percentage points to 7.9% and 9.1% respectively, having peaked at 25.7% and 25.6% earlier this year.

The MNB is now expected to ease the base rate by 75 bps for a third month in a row this week, taking it to 10.75% from September’s peak of 13.00%.