MNI WATCH: NBH To Slow Cuts In Line With March Guidance

The National Bank of Hungary is expected to slow the pace of rate cuts from 75 to 50 basis points when it meets on Tuesday amid declining risk appetite and as it anticipates a pickup in headline inflation after June. (See MNI EM POLICY: NBH Set To Confirm Markets' 50BP Cut Expectation)

Consumer prices rose by 3.6% in March compared with 3.7% inflation the previous month, while core inflation fell from 5.1% to 4.4% over the same period despite 100bps of easing in February.

However, that cut was the last in a series of large steps, the central bank later said, with the need to maintain financial market stability and changes in the global risk environment justifying an “increasingly careful approach to monetary policy” in H2.

Recent repricing of the Federal Reserve rate curve in light of hotter-than-anticipated inflation data has added to the HNB’s desire to act carefully and in a data-dependent manner.

Monetary Council member Gyula Pleschinger doubled-down on central bank comments following the March decision in an interview last week, remarking: "We definitely need a more cautious rate-cycle from here composed of smaller steps. It’s not worth surprising the markets". (See MNI INTERVIEW: NBH Could Slow Rate Cuts To 75-50bp- ExGovernor)

The NBH now expects inflation to peak at between 4 and 5% this summer, with real rates seen remaining in restrictive territory for some time, with the policy rate - currently at 8.25% - likely to end the first half of the year between 6.5-7%.

Growth remains subdued, and Germany’s economic slowdown will also affect demand for Hungary’s goods. The announcement of USD1.8 billion in government spending cuts - following confirmation that Hungary’s fiscal deficit will hit 4.5% this year – will be disinflationary.

But there are signs of improvement in exports, industrial production and orders, while the gradual passthrough of strong wage increase earlier this year could support sticky services inflation.