MNI NBH Review - October 2023: Caution Reflected in Slower Pace of Rate Cut

Executive summary:

• The NBH cut the base rate by 75bps to 12.25%, in-line with the median of analyst estimates we had previewed but greater than the 50bps move seen as per the median of the Bloomberg survey.
• In its policy statement, the NBH stressed that a “cautious approach and a slower pace of interest rate cuts are warranted”.
• Deputy Governor Virag said in his post-decision presser that recent market expectations of the policy rate of around 11% by the end of this year are “realistic”.

MNINBHRevOct23.pdf

In its policy statement, the NBH struck familiar notes of “caution”, warning against “risks surrounding global disinflation and volatility in international investor sentiment”. Nevertheless, optimism continues to be seen in the domestic data, most notably in the “rapid and substantial improvement in the external balance” and expected decrease in inflation to single-digits by the end of the year. Given the emergence of both favourable and un-favourable developments, the central bank decided to err on the side of caution with a 75bp move rather than to resume 100bp cuts.

Internal decision making was revealed in remarks by Deputy Governor Virag, who said that while the 75bp move was unanimous, there were several options on the table ranging from 50bps to 100bps of cuts. The range of views among MPC members suggests the decision was far from a foregone conclusion – despite the eventual unanimous vote. Virag also mentioned that market expectations of the policy rate of around 11% by the end of this year are “realistic”. With the base rate currently standing at 12.25%, two additional 75bp cuts in each of the November and December decisions would achieve this target.