Hungarian policymakers set base rate at the year’s final meeting – update
The Monetary Council of the National Bank of Hungary (NBH) decided to leave the central bank base rate unchanged at 6.50pc at a monthly policy meeting on Tuesday.
The National Bank policy makers left the base rate on hold at the previous two meetings, in October and November, too.
The Council also left the O/N deposit rate at 5.50pc and the O/N collateralised loan rate at 7.50pc. The rates mark the ends of the central bank’s symmetric interest rate corridor.
In a statement released after the meeting, the Council said the expected interest rate paths and future fiscal policies of major economies are still surrounded by uncertainty. Ongoing geopolitical tensions are raising upside risks to inflation through risk aversion towards emerging markets. Looking ahead, a careful and patient approach to monetary policy is warranted. In the Council’s assessment, geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant further pause in cutting interest rates.
“In the current macroeconomic environment, the Bank can make the most effective contribution to the easing of economic agents’ increased precaution and to the restart of economic growth by maintaining price stability and financial market stability” the policy makers said.
“Restrictive monetary policy contributes to the maintenance of financial market stability and the achievement of the inflation target in a sustainable manner by ensuring positive real interest rates,” they added.
The NBH said it considers it crucial that short-term interest rates develop consistently with the level of interest rates determined by the Council in every sub-market and in every period. In line with its earlier practice, the Bank pays special attention to the expected state of the FX swap market at the end of the year. To ensure the effectiveness of monetary policy transmission, the NBH smooths movements in financial markets by using instruments with longer maturities in December, in addition to one-day FX swap tenders announced on a daily basis and weekly discount bill auctions.
At a press conference after the meeting, deputy governor Barnabás Virág said the expected inflation path for 2025 has shifted higher, and a persistent return to the 3pc inflation target has been delayed to 2026. He noted that despite the delay, inflation will remain within the tolerance band for most of 2025.
Citing the projections in the latest quarterly Inflation Report of the NBH, Virag said average annual inflation is set to reach 3.6pc-3.7pc this year. In the previous report, published in September, the NBH had put 2024 average annual inflation at 3.5pc-3.9pc.
The NBH forecasts average annual inflation of 3.3-4.1pc for 2025 in the fresh report, up from 2.7-3.6pc in the previous one, and between 2.5-3.5pc for 2026 and 2027.
The report also says that the Hungarian economy is expected to grow by 0.3-0.7pc in 2024. The NBH forecasts 2.6-3.6pc GDP growth in 2025, 3.5-4.5pc in 2026, and 2.5-3.5pc in 2027.
Virag said in 2024 Hungary’s economy will expand more moderately than expected. The subdued growth is due to factors beyond the scope of monetary policy, like agriculture output, German industrial production and postponed investments. From 2025 onwards, economic growth will be based on increasingly broad foundations and the economy is projected to enter a dynamic phase of growth from the middle of the year again.
Answering questions from journalists, Virag said a vast majority of rate-setters voted to keep the base rate unchanged and one member of the Council voted to cut the base rate by 25bp.
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