MNI NBH WATCH: Hungary Cuts Slow To 75bp As Risk Appetite Ebbs
Cautious National Bank of Hungary cuts by less than macroeconomic conditions allow after rows with government rattle markets
As expected, the National Bank of Hungary cut interest rates by 75bp to take the base rate to 8.25% Tuesday, with recent forint weakening following a series of rows with the government in Budapest cited as the reason why it did not repeat last month’s 100bps pace despite falling inflation and muted demand pressures. (see MNI EM POLICY: Hungary Central Bank Likely To Cut By 75bp)
“According to the assessment of the Monetary Council, the continued strong and general disinflation allows a further reduction in the base rate, while the increasing financial market risk aversion justifies a slower pace than in February,” the NBH said in a statement. “In line with this, at its meeting today, the Monetary Council cut the base rate by 75 basis points to 8.25 percent.” (see MNI HNB WATCH: 75bp Cut Base Case As Rows Hit Risk Appetite)
Inflation is expected to pick up temporarily towards the middle of the year due to base effects, with the weaker forint seen in recent weeks also pointing to a rise in imported inflation, the bank said. Equally, the weaker cyclical position of the domestic real economy will have a disinflationary impact in the near term.
The decline in core inflation seen in recent months is expected to stop in Q2, with underlying inflation seen fluctuating at between 4.5% and 5% for the remainder of the year. Overall, annual inflation will be between 3.5% and 5% in 2024, less than the 4.0-5.5% predicted in December 2023.
Growth is expected to pick up in the second half of this year, with improvements already seen in construction and retail sales volume since the beginning of the year, although industrial production fell, with the persistently weak performance of Europe’s economy continuing to hit exports. (see MNI INTERVIEW: NBH Could Slow Rate Cuts To 75-50bp- ExGovernor)
Overall, the NBH lowered its growth forecast for the year from 2.5–3.5% to 2.0-3.0%, with the gradual expansion in Hungary’s GDP supported mainly by domestic demand thanks to moderating inflation, rising real wages and improving confidence.