Breaking: Hungarian central bank cuts interest rates further, forint reacts – UPDATE

As expected, the Hungarian central bank continues to slow down: it cut the base rate by 50 basis points to 7.75%, after a cut of 100 and then 75 basis points.

Hungarian central bank slows down

This continues the cycle of interest rate cuts, but at a slower pace than in previous months. According to Portfolio, monetary easing could come to a complete halt from the middle of the year.

Photo: FB/MNB

The Hungarian central bank announced in March that it plans to cut interest rates by 50 basis points from April, slowing the pace of interest rate cuts from the 75-100 basis points of recent months. According to Portfolio, the slowdown is understandable from several points of view:

1. The period of rapidly declining inflation has ended. From May onwards, the inflation rate is likely to remain above the central bank’s target range of 2-4% until the end of the year.
2. The forint failed to stabilise at a stronger level, with the exchange rate against the euro stuck above 390, which worsens the inflation outlook.
3. Interest rate cuts have brought yield levels in the region within reach, and Hungary’s risk premium relative to developed markets (especially the US) has continued to narrow.

As InfoStart reports, speaking on the sidelines of the last policy meeting, Barnabás Virág, vice-president of the central bank, said that the “rapid-action phase” of monetary policy has come to an end, with the pace of interest rate cuts slowing down in the second quarter and monetary policy entering a new phase.

How did the forint react?

Photo: depositphotos.com

On Monday, the forint ended the day around the opening level. On Tuesday, it started with a slight weakening, then dipped below the 394 level. After the 50-point cut, the exchange rate against the euro stands at around 393.50.

Information from the Hungarian News Agency (MTI)

The Council also decided to lower the symmetric interest rate corridor in tandem, bringing the O/N deposit rate to 6.75 percent and the O/N collateralised loan rate to 8.75 percent.

At the previous policy meeting in March, the Council cut the base rate by 75 basis points to 8.25 percent.

“The outlook for inflation warrants further reduction in the base rate at a slower pace than earlier,” the Council said in a statement released after the meeting. “The volatile risk environment continues to warrant a careful and patient approach to monetary policy,” the policy makers added.

The Council noted that the slower pace was in line with the start of a “new phase” in April and said any further reductions in the base rate would be taken “in a data-driven manner”.

At a press conference after the meeting, NBH deputy governor Barnabás Virág said the slower pace of easing was justified by the inflation outlook and increasing risk aversion. The volatile risk environment requires a “careful and patient” approach to monetary policy, he added.

He pointed to “strong and broad-based” disinflation, but said market services were “falling slowly” from a high level, a development the Council was following with “special attention”.

He said that preserving financial market stability “remained a priority”.

Virág noted that slowly dropping service price inflation was a general trend in the global economy.

He acknowledged the positive impact on Hungary’s risk assessment of historically high international reserves and an improving current-account balance, but said worsening international sentiment had driven risk premia on Hungarian assets higher in the recent period.

Fielding questions about the base rate horizon, Virág said there was “no place to rush”, adding that policy makers would take decisions “from month to month” that were appropriate based on the freshest macro data and global financial market assessments.

He said that inflation could rise temporarily from the middle of the year and that policy makers would have to weigh policy decisions “very cautiously” in the second half of the year, when room for further rate cuts could be “very limited, based on information available at present”.

He said the 50-bp cut was the only option discussed at the meeting and the decision on the reduction was unanimous.

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