MNI NBH WATCH: Rates Held As Outlook For 2024 Cuts Weakens

MNI (LONDON) - The National Bank of Hungary held its base rate at 6.75% on Tuesday, citing an uptick in the pace of price rises, recent market volatility and uncertainty around DM central banks' future moves as reasons to be cautious, despite a weaker economic outlook. (See MNI EM POLICY: Inflation Rise, Fed, ECB, Add To NBH Caution)

Reference to market expectations of one to two more rate cuts this year being “realistic” were also absent from  the background presentation published after Tuesday’s decision, which came after headline inflation rose by 4.1% in July up from 3.7% in the previous month, while measures of core inflation increased to 4.7%.

Rather, it was stated that “there may be scope for cautiously lowering interest rates further in the coming period, depending on the expected interest rate policies of the world’s leading central banks, as well as developments in the domestic inflation outlook and changes in Hungary’s risk perception.”

Much the latest increase in prices was attributed to higher dynamics of processed food, however disinflation of market services continues to be slow, with the Monetary Council paying "special attention to pricing decisions in the sector,” the NBH said in a statement.

Market pricing ahead of expected Federal Reserve and ECB September rate cuts, and the communication around those decisions, also featured prominently.

INCOMING DATA

The NBH did not repeat last month’s assertion that incoming data was consistent with June’s Inflation Report forecast, with new projections due in September.

But it reiterated that while the pace of price rises will fluctuate close to the upper bound of the tolerance band in the coming months, rising close to 5.0% temporarily by the end of the year, the disinflationary process will continue in Q1 2025

Domestic financial markets were affected negatively by a sharp, if temporary rise in global market volatility, the NBH said, reinforcing the need to adopt a “careful and patient approach” to monetary policy, which it earlier said had entered a "new phase" of cautious calibration after a period of rapid easing.

Hungary’s domestic economic performance fell by 0.2% quarter-on-quarter, consistent with a 1.5% increase in annual GDP, the Bank added.

The NBH therefore removed July’s reference to an “incipient recovery” in Hungarian economic growth, and referred instead to the country’s “stalled” Q2 recovery, with the slow improvement of consumer and business confidence offset by “persistently weak” external demand.