MNI POLICY: NBH Set To Confirm Markets' 50BP Cut Expectation

The National Bank of Hungary is likely to lower the base rate by 50 basis points to 7.75% next week, MNI understands, as it eases cautiously with an eye on financial stability.

Nothing has been decided ahead of next Tuesday’s policy meeting, but with caution and data-dependency still the Monetary Council’s watchwords there is little chance the Bank will depart from its guidance in March for an “increasing risk aversion” justifying a slower pace of base rate cuts.” The NBH cut its policy rate by 75bp in March and 100bp in February. (See MNI EM NBH WATCH: Hungary Cuts Slow To 75bp As Risk Appetite Ebbs)

Headline inflation will tick up to 4-5% in the summer due to baseline effects, with geopolitical uncertainty seen as a major source of upside risk in the coming months. Rate-setters will wait to see what action to take in June and beyond, but real rates are set to remain in positive territory for some time.

FED, ECB

The NBH will keep a close eye on interest rate developments at both the Federal Reserve and the European Central Bank, in order to assess how it and central banks across the region might react to a significant divergence in policy rates, but it would take a game-changing drop in inflation for it to alter its approach. (See MNI SOURCES: ECB Still Divided Over Guidance As It Nears Cuts)

Hungary’s government this week announced cuts worth USD1.8 billion to its 2024 spending plans, and said that the budget deficit will increase from the 2.9% of gross domestic product previously predicted to 4.5%. The government’s recent clear communication with markets will make fiscal policy less of a constraint for the central bank.

There is also growing confidence that 2023’s Q4 current account deficit of EUR561 million was not representative of a change in dynamics, but rather a one-off, with continued improvements in exports, industrial production and orders expected to have a positive impact.