MNI NBH WATCH: 25 Basis Point Cut, Outlook "Unchanged"

MNI (LONDON) - The National Bank of Hungary cut key interest rates by 25 basis points as expected on Tuesday, with CPI inflation seen falling further in September, rising to just above 4% by year end, then declining from Q1 2025. (See MNI EM POLICY: NBH To Cut 25 Basis Points)

The decision to lower the base rate to 6.50% came as NHB September projections showed headline inflation averaging 3.5-3.9% this year, 2.7-3.6% in 2025 and 2.5-3.5% in 2026, the Bank said in a statement. This year’s range narrowed from the 3.0–4.5% seen in June, while in 2025 the range increased slightly, and 2026 was unchanged.  Core inflation will fluctuate close to 5% for the rest of the year, the NBH said.

Market services inflation continues to fall at a slower rate than in other areas, and household inflation expectations, while heading downwards, have mirrored recent volatility in prices - a trend expected to continue into 2025.

Recent European Central Bank and Federal Reserve cuts mean Hungary’s external monetary policy environment has become looser, but the outlook for external economic activity remains “subdued,” the Bank said, adding that its outlook on medium-term developments determining inflation is "fundamentally unchanged." (See MNI EM NBH WATCH: NBH To Cut By Quarter-Point, Stay Cautious)

Hungarian GDP is now expected to grow by 1.0–1.8% 2024, 2.7–3.7% in 2025 and by 3.5–4.5% in 2026, according to the September projections. Deficit reduction measures will continue to support progress towards the government’s fiscal deficit targets of 4.5% in 2024 and 3.7% in 2025, the Bank said, with a likely budget deficit-to-GDP ratio of 4.3-4.7% in 202 and 3.2-4.2% in 2025.

“For the debt ratio to continue declining in 2024 and Hungary’s risk perception to improve, it is necessary to achieve the set deficit targets in a credible manner,” it added.

By contrast, government debt-to-GDP is now seen falling from the previously projected level of 73.2% in 2024 to 72.3% in 2025 and 70.8% in 2026.

Overall, the statement said, “the Bank can make the most effective contribution to the easing of economic agents’ increased precaution and to the restart of economic growth by achieving price stability and maintaining financial market stability. 

“Volatile financial market developments, the renewed increase in geopolitical tensions and the risks to the outlook for inflation continue to warrant a careful and patient approach."