MNI NBH WATCH: Hold Expected, 2025 Outlook More Complicated
MNI (LONDON) - The National Bank of Hungary is expected to leave key interest rates on hold this week, despite better-than-expected monthly inflation data, with the rate of increase in prices still expected to pick up this year and into 2025. (See MNI POLICY: NBH Cautious Despite Lower Near-Term Inflation)
The NBH said in October - when it first paused rate cuts - that it was prepared to hold rates for an “extended period” should weakening investor sentiment, volatile commodity prices and upside inflation risks persist. It also expressed its readiness to smooth movements in the event of volatility if necessary, by using instruments with longer maturities.
Prices data has since surprised to the downside, gaining 0.2% on the month to leave annual inflation at 3.2%. The forint, though weaker in the wake of this month’s U.S. presidential election, has retraced some of its losses.
But upside inflationary pressures remain, most notably the possibility of renewed market instability early next year, expansionary fiscal policy and a possible budget deficit overshoot.
While the outlook for near-term inflation - which was expected to exceed 4% by the end of the year - has improved, the NBH remains cautious in outlook. Messaging will remain hawkish but not too-hawkish, with the bank showing little desire to rock the boat so close to Governor Gyorgy Matolcsy’s March exit.
That could mean rates remain unchanged until the next governor, widely expected to be current finance minister Mihaly Varga, takes over.
But there appears to be a growing consensus that his preference is for an equally data-driven, conservative approach to setting monetary policy, with the prospect of further dollar strengthening, budgetary slippage and fiscal generosity complicating the view ahead.