MNI NBH WATCH: 1-2 More Cuts This Year, But Caution Still Key

MNI ((MNI) LONDON) - MNI (LONDON) - The National Bank of Hungary lowered key interest rates by 25bps on Tuesday, and said it expects to make one or two more cuts, but kept its forecast for year-end inflation unchanged. (See MNI EM POLICY: NBH Leans Towards July Cut, Outlook Unchanged)

Caution coupled with restrictive monetary policy remains key to maintaining financial market and price stability, the Bank said in a statement.

The base rate now stands at 6.25%, the overnight deposit rate at 5.75% and the overnight collateralised lending rate at 7.75%.

Inflation is expected to fluctuate close to the upper bound of the Bank’s tolerance band for the remainder of the year, it continued, consistent with the path laid out in June projections.

Annual inflation is seen averaging between 3.0-4.5% in 2024, with core inflation rising close to 5.0% temporarily by the end of the year. June’s consumer prices rose by 3.7% in annual terms, caused mainly by falling fuel prices, while core inflation and core inflation excluding indirect tax effects rose slightly to 4.1%.

The Monetary Council is paying “special attention” to service sector pricing decisions, where disinflation is proving sluggish, noting also that while June household inflation expectations fell relative to the previous month, they remained at high levels.

While one-and-a-half and two-year interest rate expectations have shifted significantly downwards in recent weeks, more incoming data is needed to assess the sustainability of the disinflation processes, the statement said.

“The latest inflation data, which is better than market expectations, does not change the expected inflation path, but in addition to the strengthening of the country's risk perception, it allowed earlier implementation of the interest rate cut,” the statement said.

“In the second half of the year, the inflation will remain lower than the market expectations despite the repricing that will be higher than the historical average.”