MNI POLICY: Jan Data Confirms NBH Hold, But Improvements Seen
MNI (LONDON) - The National Bank of Hungary will hold its base rate at 6.50% on Tuesday after recent upside inflation surprises, MNI understands, with the jury out on whether cuts will be possible this year despite expected improvements in the overall price outlook.
January inflation of 5.5% has made the central bank more determined to maintain interest rates at their current level, as part of a safety-first approach ahead of new Governor Mihaily Varga's arrival next month.
But while policymakers will feel it is too early to say whether there is room to ease this year, there is optimism that inflation has peaked.
January’s negative surprise in services pricing contributed to an inflation figure that substantially exceeded the 4.1% upper end of the range seen in the NBH’s December Inflation Report. This came after October’s surprise decrease in telecommunications prices was seen as having temporarily skewed inflation lower in the autumn, while forint weakening towards the end of the year was still being passed through last month.
BASE CASE
Still, a gradual deceleration in inflation remains the central bank’s base case scenario, though how quickly this will occur is unclear.
Base effects are already contributing to an improvement in the inflation outlook, and the forint has appreciated in 2025 as market sentiment has improved, helped in part by talk of a peace in Ukraine.
But uncertainty over the effect of U.S. policy shifts on Europe’s economy is high.
While a shift to an expansionary fiscal stance will add to inflationary pressures, recently-announced tax breaks for mothers and price caps on food are not expected to have a major effect on Hungary’s budget deficit this year, with the government still targeting a deficit of 3.7% of GDP. (See MNI EM INTERVIEW: Hungary Fiscal Boost An Inflation Threat)
Should these policies remain in place after 2026 elections, their effects will be spread out over a longer period and be less significant for monetary policy.