Monetary policy enters a new phase in Hungary, with smaller interest rate cuts to follow

Key messages

• In the Hungarian economy, both the internal and the external demand pressures are low and have a disinflationary impact. Inflationary developments are influenced by two opposite effects, the weakening of the forint and the weaker cyclical position of the real economy.
• We have entered a new financial market environment, and mounting risk aversion justified a smaller rate cut than in February.
• With today's rate decision the phase of monetary policy operating with quick steps has come to an end.
• Monetary policy is entering a new stage. The pace of easing will be lowered in the second quarter.
• A tight monetary policy environment remains necessary. Money market stability plays a key role in achieving the inflation target sustainably.
• A base rate of 6.5-7.0% is a realistic scenario for the end of the first half, which would continue to translate into a stable, positive real interest rate environment.
• Given the changing global risk environment, an increasingly prudent monetary policy is needed in the second half of the year.

The MNB's comments today are in line with previous prognoses. Among the possible interest rate paths outlined ahead of today's rate decision, the one with 50 basis point rate cuts from now until June is likely to materialise.

Virág again indicated that some rate cut expectations have been exaggerated recently, particularly regarding the end-year base rate.

About the 75bp cut

The Monetary Council also considered the possibility of a 50, 75 and 100 basis point rate cut, said the Deputy Governor. (This also shows that the uncertainty of market analysts, who also hesitated between all three outcomes, was justified.)

Inflation this year may be lower than previously expected

On the outlook, Virág said that annual average inflation could be between 3.5 and 5.0% this year, with GDP expanding by 2-3%. Both forecasts were down from the last forecast in December.

The disinflationary trend is encouraging, but a determined monetary policy is needed to achieve price stability on a sustained basis. The growth outlook has become gloomier due to the deterioration in the external environment, he said.

The engine of growth

The economy could be driven by gradually recovering private consumption, driven by rising real wages and improving consumer confidence. Meanwhile, the export outlook has deteriorated as Hungary's external markets are slowing. The contribution of net exports to growth could turn positive again in 2025.

Why all this caution?

Inflation trends are encouraging, but the external and internal risk environments need to be taken into account and negative developments can be identified. These include geopolitical tensions, volatile perceptions of emerging markets, caution on the part of central banks in developed countries and rising risk premiums on Hungarian assets.

Four-factor decision matrix

In setting interest rate policy, the central bank pays close attention to a number of factors.

Inflation

The pace of price increases will temporarily pick up in the middle of this year due to ex-post pricing of market services and base effects. The question is how inflation will evolve in the second half of the year. A key element in this is the anchoring of expectations.

 Risk perception

 Of key importance for the country's risk perception are (i) the credible achievement of the fiscal deficit targets and (ii) the external balance developments this year.

International monetary policy environment

Looking ahead, questions remain about the timing of the first interest rate cuts by the major global central banks and the likely paths of interest rate cuts thereafter.

Financial market stability

In the volatile international investor sentiment, a key question is whether risks to the forint exchange rate or domestic yields will emerge or not.

What to expect in H2?

We can make projections with a high degree of certainty up to the middle of the year, there are so many unknown macroeconomic and financial market variables that all we can say for the end of the year is that the central bank's cautious, data-driven approach will remain, said Virág, again indicating that year-end expectations have been excessive.

Does the central bank have a current exchange rate target range?

The central bank has a price stability target, said Virág in the obligatory answer to the question. The factors that determine inflation are assessed by the central bank as a whole, the money market factor is an important element and may become even more important in the future when looking at the structure of inflation.

What does the central bank say about the scrapping of the interest rate freeze?

The more effective the monetary transmission, the more effective the disinflation can be. The removal of interest rate caps is an important step towards restoring transmission and the central bank welcomes this move.

(The question and answer was about the phasing out of the deposit rate cap on 1 April and the end of the interest rate freeze on SME loans on the same date, while the interest rate freeze on residential mortgages will remain in place until at least 30 June, as things stand.)

Does the MNB support the government's high-pressure economic policy?

The economic environment in 2024 is not the same as before 2020, especially in terms of inflation. All our analyses show that the key challenge facing economic growth is to restore confidence and the faith of economic agents. This can be achieved through price stability, said Barnabás Virág.