MNI POLICY: NBH Leans Towards July Cut, Outlook Unchanged

MNI ((MNI) LONDON) - MNI (LONDON) - The National Bank of Hungary is likely to cut rates by 25 basis points on Tuesday, MNI understands, but while falling headline inflation may allow it to ease more quickly than expected, 2024's projected terminal rate will not change.

Deputy governor Barnabas Virag commented last week that the question of whether to hold the base rate at 7.00% or opt for a second successive quarter-point cut was “absolutely open,” after June's 3.7% CPI inflation downside surprise. (See MNI EM NBH WATCH:CPI-Core Divergence Complicates Cut Calculations)

Given the NBH’s strong aversion to surprising markets, his mention of a possible 25bp cut can be taken as indication that the Monetary Council is leaning that way, MNI understands. 

Yet there is no desire to see market interest rate pricing for the year change, and the expectation is still that there will be two to three cuts this year. Cuts may come earlier, but there will not be more of them.

The Bank is also seen maintaining its cautious approach even if other factors - such as a repricing of Federal Reserve rate cuts - indicate a more favourable external environment.

Fiscal policy is expected to increase the inflationary path this year and next somewhat, but its overall impact will be limited. There is hope too that the government can still achieve its target of a spending deficit equivalent to not more than 4.5% of GDP - a development that would be viewed as supportive for monetary policy.

The imposition by Ukraine of a partial ban on transporting oil through Hungarian territory has not yet had a significant impact on either the exchange rate or government bond prices, and will not impact July’s MPC decision. However if the horizon of the ban or its market impact changes over time then it would become more relevant.