CORRECTED-MNI POLICY: Hungary CenBank Set To Cut 100BP

(Corrects story published Feb 23 to make clear that vote for January rates cut was not unanimous)

Barring unexpected market volatility, the Hungarian National Bank is likely to cut the base rate by 100 basis points to 9.00% when it meets next week, as inflation eases and the risk rises of recession this year, MNI understands.

The MNB’s Monetary Council had been expected to quicken its pace of monetary easing to 100bp when it last met on Jan 30, but in the event an adverse market reaction to reports of a government proposal to change the reference rate for loans from the interbank rate to Treasury bill yields prompted members to vote in favour of a 75-point cut. (See MNI POLICY: Hungary Cenbank Weighs Proposed Benchmark's Impact)

This time, with tensions between Hungary and the EU over aid for Ukraine subsiding, the reference rate proposal off the table, and government measures to provide short-term interest rate relief for borrowers seen as having no significant impact on loan demand, 100bp appears to be the baseline, given falling inflation and growth, though the final decision will only be taken on Tuesday and some arguments have been made for another 75bp cut.

The MNB is conscious, though, that market pricing for cuts by the Federal Reserve, the European Central Bank and the Bank of England has moved further out, and will continue to communicate cautiously. And, given the already-fast pace of easing, weaker-than-expected economic growth on its own will not be sufficient to prompt any in increase in the pace of cuts above 100bp for the foreseeable future.

GROWTH FALTERS

Growth, which was flat in the fourth quarter of last year, now looks in danger of turning negative over all of 2024, compared to the 3-4% expansion the MNB anticipated in November. The central bank will release its next projections in March.

January’s headline annual inflation print also in lower-than-expected, down 1.7% to 3.8% - attributable largely to smaller-than-anticipated increases to fuel prices - while at 6.1% core inflation was in line with central bank projections.

Some pickup of inflation is seen over the medium term, and fiscal policy remains a source of uncertainty. In particular, officials will want to assess the effects on inflation of likely increases to tax or duty regimes, with some upward movement in headline inflation seen in Q2 due to baseline effects.