Hungarian central bank cuts the base rate again

Hungarian central bank rate-setters reduced the base rate by 75 basis points, to 8.25 percent, at a regular policy meeting on Tuesday.

The Council also decided to lower the symmetric interest rate corridor in tandem, bringing the O/N deposit rate to 7.25 percent and the O/N collateralised loan rate to 9.25 percent.

At the previous policy meeting in February, the Council had cut the base rate by 100 basis points.

In a statement released after the meeting, the Council said that “over the past few months, disinflation in the Hungarian economy has been stronger than expected, while external and domestic demand pressures have remained persistently low. However, in the volatile international sentiment, the risk premium on Hungarian assets has also risen recently”.

“According to the assessment of the Monetary Council, the continued strong and general disinflation allows a further reduction in the base rate, while the increasing financial market risk aversion justifies a slower pace than in February,” the Council added.

At an online briefing after the meeting, central bank deputy governor Barnabás Virág said the slower pace of easing was justified by increasing risk aversion. He added that the policy makers had discussed three options, a 50bp, 75bp and 100bp cut, and decided unanimously on the 75bp one.

The decision on Tuesday marks the end of a phase of monetary policy operating with “large steps” and the start of a new phase said Virág.

He said the pace of rate cuts would slow in the second quarter, adding that maintaining a tight monetary policy stance was necessary.

Virág said that financial stability plays a “key role” in the sustainable achievement of the inflation target.

The deputy governor said expectations for the base rate to reach 6.5-7 percent at the end of the first half were “realistic based on information at present”. In the second half of the year, an increasingly cautious monetary policy approach will be necessary with a view to changes in the global risk environment, he added.

Virág pointed to the slower pace of external inflation, “volatile” risk perceptions of emerging markets, the potential inflationary effect of geopolitical tensions and an upward shift of the expected interest rate paths of big central banks among international risk factors. He acknowledged “strong and broad-based” domestic disinflation, but noted that the risk premium on Hungarian assets had risen recently.

In the coming months, Virág said the Council would take decisions on further base rate cuts and their optimal pace “in a data-driven manner”.

The policy makers discussed the central bank’s latest quarterly Inflation Report at their Tuesday meeting. In the report, to be published in full on Thursday, the NBH lowered its forecast for 2024 average annual inflation to 3.5-5.0 percent from 4.0-5.5 percent in the previous report published in December. The central bank sees inflation falling to the 2.5-3.5 in 2025.

Virág said inflation would temporarily rise in the middle of 2024 because of retrospective pricing of market services and base effects. He added that the 3.0 percent inflation target would be reached in a sustainable manner in 2025.

The fresh report forecasts GDP growth of 2.0-3.0 percent in 2024 and augurs an acceleration to 3.5-4.5 percent in 2025.