MNI POLICY: Length Of NBH Rates Pause Linked To Risk Appetite

MNI (LONDON) - The National Bank of Hungary will hold key interest rates when it meets this week as it looks to ensure stability in the face of volatile geopolitics and weaker international risk appetite, with an expected pick-up in inflation adding to the case to avoid cuts in coming months despite sluggish growth, MNI understands.

Deputy Governor Barnabas Virag said earlier last week that the Bank is ready to pause rate cuts “for a sustained period” if required by the inflation outlook and global market sentiment. (See MNI EM NBH WATCH: 25 Basis Point Cut, Outlook "Unchanged")

No decision on whether to change the base rate - currently at 6.50% - has been taken ahead of Tuesday’s meeting, but Virag’s remarks signal consensus among Monetary Policy Council members that policy should remain unchanged. The Council previously paused the easing cycle in August, before delivering another 25-basis-point cut last month.

Actual inflation data is consistent with the middle of the range of the September forecast, with risks seen as broadly balanced, but global risk appetite has deteriorated since September, with volatility stemming from geopolitical risks in the Middle East, the U.S. election and changing Federal Reserve rate expectations making it difficult to say how long the NBH’s pause will last. Moderate increases in oil and gas prices, exchange rate weakening and strong wage growth into 2025 have further complicated the outlook.

MONETARY POLICY TRANSMISSION

The NBH is still confident that inflation will return to target over the medium term. Yet if risk appetite does not rebound in the near term, further rate cuts are unlikely to be forthcoming for some time, especially with inflation expected to pick up to a little above 4% by the end of the year due to base effects. 

The NBH has also noted that the pace of the exchange rate transmission into the real economy has accelerated compared with the previous decade, providing further argument for caution.

But central bank expectations for sluggish GDP growth in Q3 have been confirmed.  Some pick-up is expected next year, although the direction of the broader European economy remains an open question, with uncertainty over whether key European sectors such as the automotive industry have bottomed out.

Hungary’s government appears to be serious about meeting its fiscal deficit targets and reducing the country’s debt to GDP ratio - a development that is likely to favour the central bank. (See MNI EM INTERVIEW2 Hungary Keeps Deficit Plans, Minister Nagy Says)

Spending by firms and households is less of a concern than it was a few months ago, though the pace of investment growth - already starting from a low base after a significant fall – is still slow.