Hungary c.banker heralds 75bp rate cut for next week
We still cannot sit back, as we are in a turbulent environment, data-driven mode and prudence in monetary policy decisions are of paramount importance, Barnabás Virág said at a conference in Budapest on Thursday.
The Deputy Governor pointed out that the 9.9% inflation rate in October was lower than the central bank's expectation, and oil prices were also lower, so
the current environment supports the central bank to continue cutting interest rates in November at the previous month's pace of 75 basis points.
This means that there is a good chance that the Monetary Council will lower the base rate from the current 12.25% to 11.5% next Tuesday. The Deputy Governor said that the policy rate could be "below 11% by the end of the year", a change from the 11% forecast he had made in October. That means the current pace of rate cuts could continue into December, bringing the rate down to 10.75%. Virág also pointed out that February could be the first time the base rate is below 10%.
Virág's remark is significant because he has effectively dispelled expectations of a 100bp rate cut, which occurred on the market after the lower-than-expected October inflation data. It is also crucial that the central bank is now expecting a lower year-end interest rate instead of the previous 11%.
Virág pointed out that the macroeconomic fundamentals were positive, with inflation falling and the current account balance better than expected. At the same time, financial market sentiment remains fragile, with geopolitical tensions around the world and recession risks emerging globally, he warned.
In his presentation, Virág spoke about how inflation has been the public enemy in the world for the past 2-2.5 years, and that this has been roughly twice as much of a burden for our region as for Western Europe. As he said, Western European countries talk about high inflation, but in our country it has been "nightmarish". A big positive for the Hungarian economy is the labour market, which remained tight even in the crisis.
Virág said that during the period of high inflation, many Hungarian firms increased their profitability as a result of price increases, so they now have room to retain their workers, and they should use this room to do so in the context of relatively high nominal wage increases.
We have a good chance of achieving inflation of around 7% by the end of the year, but my personal view is that December's figure could be even below 7%. Previously I said I expected 7 to 8%, now after the positive October data it could be lower, but a lot depends on the oil price developments,
he underlined. Virág said there is a good chance that the Hungarian economy will be on a balanced growth path in 2024, with real wages rising by 4 to 5%. He noted that deferred government investment could pick up, and exports could also be supportive.
The positive real interest rate is helping to sustain disinflation, and this must continue, said Barnabás Virág. He added that in the new monetary policy era, they are focusing on macroeconomic fundamentals, where they have seen important improvements in inflation and the balance of payments, but at the same time they have to take into account developments in financial market sentiment.
Cover photo: Portfolio
