MNI NBH Preview - December 2023: "Gradual" Easing Pace to Be Maintained

Executive summary:

• The NBH are widely expected to deliver another 75bp cut to the base rate at its December meeting.
• While benign inflation developments and progress in unlocking EU funds could facilitate a more dovish move, the NBH are instead seen maintaining its “cautious” stance and opting for a third consecutive 75bp cut, taking the base rate to 10.75%.
• Of the sell-side views we have previewed in this document, all are expecting a 75bp cut to the base rate (and indeed identical easing decisions through to the February meeting), though some have noted slight risk of a larger move this month.

See the full preview, with a summary of sell-side analyst views, here:

MNINBHPrevDec23.pdf

Since the November MPC decision, headline inflation has continued to decline, falling by 2ppt from +9.9% y/y in October to +7.9% in November while core inflation fell to +9.1% y/y from +10.9%. Hungary’s external balances also continue to show signs of improvement as trade and current account data have been in positive territory in the second and third quarters of the year. Furthermore, access to around EUR10.2bln of previously frozen EU cohesion funds following Hungarian judicial reforms provided some initial relief to the forint, though its gains were quickly reversed.

Overall, the forint has weakened ~1.3% against the euro since the previous NBH meeting on Nov 21 as ECB and Fed officials continue to push back against market pricing of rate cuts in March/April 2024. Indeed, EUR/HUF has recently breached resistance at 383.55, the Dec 12 high. The break higher undermines the recent bearish theme and instead strengthens a developing bullish trend. An increase in the pace of easing from the National Bank of Hungary may prompt additional forint weakness – which would be particularly undesirable given that external geopolitical risks (EU-Hungary relations, Israel-Hamas and Russia-Ukraine wars) have shown few signs of abating. The central bank will therefore likely stick to its well-telegraphed easing cycle this month – as per the Bank’s previously offered guidance that additional rate cuts will be “gradual”.