MNI NBH WATCH: Base Rate Held At 6.5% As Inflation Surprises
MNI (LONDON) - The National Bank of Hungary left its base rate unchanged at 6.50% despite December’s upside inflation surprise, and said that while price rises should moderate there was an increased risk they would be stronger this year than previously anticipated.
“The temporary rise in inflation is expected to continue in January 2025," the NBH said following the widely anticipated decision, “but the disinflationary trend will restart thereafter. Disinflation is supported by more moderate repricing in market services, while being slowed down by changes to the system of excise duties and the exchange rate depreciation of recent months."
The NBH reiterated that its base rate "may remain at the current level for an extended period," but changed its forward guidance to indicate that "geopolitical tensions, a volatile financial market environment, and risks to the outlook for inflation warrant the maintenance of tight monetary conditions."
Inflation is now seen returning to the tolerance band later than projected in the December Inflation Report, the Bank said, leaving March's edition a likely bellweather for future rates decisions (See MNI EM POLICY: NBH March Projections Key To Policy Outlook)
Household inflation expectations have been on an upward trend since July, the NBH said in a statement, with incoming data suggesting an "increased risk of a higher inflation path this year."
CPI inflation rose by 4.6% and core inflation by 4.7% in December, with average inflation for 2024 coming in 0.7 percentage point above the bank’s 3% price stability target, the Bank said. (See MNI EM NBH WATCH: Base Rate To Hold At 6.5% Despite Price Uptick)
While the inflation pickup was attributed to rises in the cost of processed food, fuel, and durables, costlier global commodities and a weakening forint also contributed. (See MNI EM INTERVIEW2: New NBH Chief Must Clarify Reaction Function)
Hungary’s economy was “subdued” in Q4 2024, the NBH said, with improved consumer confidence and the continued growth of retail sales offset by a further decline in industrial production and construction activity. Real wage growth was strong, while the number of people in work remained high by historical standards and the unemployment rate low. (See MNI EM INTERVIEW: Hungary Fiscal Boost An Inflation Threat)
The economy is also being held back by a combination of subdued European demand and delayed investment, though domestic and foreign demand and consumption are seen improving this year.
Expected divergences in the monetary policies of the Federal Reserve and the European Central Bank over the course of this year could also lead to increased risk aversion among emerging market participants, the NBH said.