The National Bank’s decision may wreak havoc on Hungarian forint – UPDATE: HUF 400/EUR comes!

The Monetary Council of the Hungarian National Bank (MNB) is anticipated to announce another reduction in the base interest rate today. However, even slight deviations in the details could precipitate a significant fluctuation against the euro.

According to index.hu, Governor György Matolcsy and the Hungarian National Bank are gearing up for a pivotal decision that will impact the markets and the exchange rate of the Hungarian forint.

The monetary council is expected to implement a 75 basis point interest rate cut today, a move that could potentially strengthen the Hungarian forint. Currently, the national currency hovers around the 389-390/EUR mark. Nevertheless, should the interest rate cut deepen to 100 basis points, a decline may ensue once more. Zoltán Varga, a senior analyst at Equilor Investments Ltd, said that if the decision indeed entails a 100 basis point interest rate cut, the forint would breach the 390 threshold and reach 395/EUR.

Varga noted that while the consensus among experts leans towards a 100 basis point rate cut, he anticipates a reduction of 75 basis points.

Barnabás Virág, Deputy Governor of the MNB, confirmed that both scenarios—a 75 basis point or 100 basis point rate cut—are under consideration. In January, the Monetary Council was anticipated to implement a 100 basis point reduction but ultimately settled for 75 basis points.

Virág told index.hu that one argument in favour of the 100 basis point cut is the low inflation data for January. However, the decision-making process could be influenced by the extension of the interest rate cut programme by both the Federal Reserve (FED) and the European Central Bank (ECB), which suggests a more measured approach.

The MNB’s base rate affects loan interest rates, inflation and real wages in Hungary, Virág added.

Dániel Molnár, an analyst at the Makronóm Institute, suggested that if positive developments were to emerge from the Hungarian economy and both the FED and ECB opted for a rate cut, the forint could strengthen to the 385/EUR level. Currently, the forint hovers around the psychological threshold of 390/EUR as of Monday.

UPDATE1 – Egyensúly Institute: HUF 400/EUR comes!

According to the Egyensúly (Balance) Institute, the forint will continue to lose its value against the EU currency. That is because of the Hungarian National Bank’s base interest rate decreasing program. The MNB does so because of the lowering inflation, but the result is expected to be a weak forint.

Portfólió, a Hungarian economy-focused news outlet, shared the institute’s prognosis for 2024 and 2025 concerning the forint. They say that this year, the forint will move in the HUF 393-401/EUR level, while in 2025, it will be in the HUF 403-418 category.

In the last few months, the MNB protected the forint to halt its skyrocketing weakening. But declining inflation enables them to pump more money into the Hungarian economy by lowering the base interest rate. In January, the real interest rate was 6%, higher than in the last ten years. In the neighbouring countries, that is lower. Egyensúly Institute wrote that the MNB’s base rate will be below 5% by the end of 2025. Now it is at 10%.

UPDATE 2 – Here is the Hungarian National Bank’s decision

Hungarian central bank (NBH) rate-setters cut the base rate by 100 basis points to 9.00 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 8.00 percent and the O/N collateralised loan rate to 10.00 percent. In a press release, the Council said disinflation had been “stronger than expected”, external and domestic demand pressures remained “persistently low”, and Hungary’s risk perception had improved further as the current account balance improved. “This allows the base rate to be lowered at a temporarily faster pace,” the Council added.

At an online press conference after the meeting, central bank deputy governor Barnabás Virág said lower than expected inflation and improved risk perceptions had allowed for the “temporary” acceleration in the easing cycle from 75bp cuts at the previous policy meetings.

He added that the inflation path was now about half a percentage point lower than the central bank’s earlier short-term forecast.

Virág said the Council’s expectation for the mid-year interest rate level was unchanged. He added that market players’ expectations for an interest rate level of 6-7 percent at the end of the first half appeared “realistic”.

He said the Council continued to take a “data-driven” approach and noted the importance of the March Inflation Report in determining the pace of the easing cycle in the second quarter.

Answering questions, Virág said all of the internal members of the Council had voted for the 100 basis point cut, which was supported by the “large majority” of members, but there was also backing for a 75bp reduction.

Read also:

• Hungarian forint at 3-month low: no recovery in sight – Read more HERE
• 5 and 10 forints coins will be withdrawn, HUF 50-100,000 banknotes will be issued in Hungary? – Details in THIS article