Hungary central banker warns against repricing based on past inflation

Cenbank cuts rates 50bps, slowing down the pace

In line with expectations, the Monetary Council of the Hungarian central bank (MNB) has lowered the key policy rate by 50 basis points to 7.75% on Tuesday. Thus the easing cycle continues, only at a slower pace, and it may even come to a complete halt from the middle of the year.

Repricing based on past inflation is a wrong, misguided practice

Presenting the key messages, Barnabás Virág said that if some economic agents are raising prices above 10% in an inflationary environment of 3-4%, it is much more difficult to bring inflation down. This is why the MNB will closely monitor price developments in market services.

A patient approach to interest rate policy is needed,

and I would like to underline this twice," said Virág, indicating that the MNB decides on interest rates on a month-by-month, data-driven basis.

Key messages:

• Monetary policy has entered a new phase in April.
• Disinflation has been strong and general in the Hungarian economy. Inflation of market services is coming down slowly from a high level, and the Monetary Council keeps a very close eye on this process.
• Historically high foreign exchange reserves and the persistent improvement in the current account balance have contributed to the strengthening of the country's risk perception. At the same time, in the deteriorating international sentiment, the risk premium on Hungarian assets has also risen recently. 
• In the case of the Federal Reserve, the expected interest rate path, based on market pricings, shifted further upwards relative to March, while market expectations for the path of the European Central Bank's (ECB) policy rate remained broadly unchanged.
• The inflation outlook and rising risk aversion on markets warrant a slower reduction of the base rate. The volatile risk environment warrants a careful and patient approach to monetary policy in the coming months. 
• Maintaining price stability remains a priority.

Disinflationary trend slowing down globally

There is evidence that the decline in inflation in advanced economies has slowed, and in some cases even stalled, says the Deputy Governor. In Hungary, the decline in inflation is holding, but further falls are needed for the central bank to reach its target.

Services inflation stuck at high levels

This is true around the world, but the structure of inflation in Hungary has also changed dramatically.

If services inflation remains high, we can only achieve our goal with lower imported inflation.

Economic growth picking up

For the first quarter, we expect GDP growth of around 1.5% on an annual basis, based on the partial data, said Virág.

Monetary policy overview

Deflation is underway, but the pricing of services is a concern. Amid deteriorating international sentiment, emerging market sentiment is volatile, with the Fed's expected upward shift in its interest rate path pushing up developed market yields.

Domestic disinflation is strong and general. The current account surplus is large, but international sentiment has pushed Hungarian risk premia higher.

Tight monetary policy is necessary to achieve the 2025 inflation target. The achievement of the budget deficit target has become a priority from the aspect of Hungary's risk assessment. In the context of deteriorating investor sentiment, a key question is whether risks to the forint exchange rate or domestic yields are emerging.

Can the 6.5-7.0% base rate be achieved by June?

Market expectations are for the base rate to be 6.75% by June, which could be achieved with two further 50 basis point cuts, said Virág. However, The Monetary Council is constantly monitoring the situation,

there is no hurry,

we take our interest rate decisions month by month.

Interest rate policy in H2

The inflation picture and the financial market environment will determine monetary policy beyond June, said Barnabás Virág. Inflation could rise temporarily in the second half of the year, so we need to be very cautious and

THERE MAY BE VERY LIMITED SCOPE FOR INTEREST RATE CUTS IN THE SECOND HALF OF THE YEAR.

What has the MPC discussed today?

There was a single option on the Monetary Council's table today, a 50-basis-point reduction, so the decision was unanimous, said Virág.

About fuel prices

The central bank has previously warned that margins could rise following the removal of the price cap. This has happened, with current margins higher than before and higher than regional margins, said Virág.

Any intervention that brings margins down could be justified, he added.

More to follow!