Hungary central bank cuts base rate further
Today's half-percentage point rate cut matches the market's call. There have been few unexpected events in the recent past that have fundamentally affected interest rate policy. Inflation has risen minimally in line with forecasts, the forint has strengthened amid improving global capital market sentiment, and market stability has not been challenged.
Under these circumstances, there was little reason for the MNB to deviate from its interest rate policy plan. The plan is for the central bank to keep cutting the benchmark rate until the middle of the year, although not by the 100-75 basis points seen at the beginning of the easing period, but only by the same 50 basis points as in April.
The first minor question mark about this trajectory may come at next month's meeting: with inflation expected to rise above 4%, will the central bank stick to the 50 basis point pace, or will it already be slowing down to 25 basis points, indicating what we can expect in the second half of the year? In the former scenario, the base rate will end the first half of the year at 6.75, in the latter at 7%.
The central bank has hinted more and more recently on what to be expected in the second half of the year. On the one hand, the international interest rate environment is not really supportive for the time being, with a yield level matching the risk premium still needed maintaining even with a Fed rate at 5.00-5.25%. On the other hand, domestic inflation could creep back to close to 6% by the end of the year, so there is not much room for interest rate cuts under the (ex-post) positive real interest rate rule set by the central bank.
By emphasising these considerations, the MNB has also pulled market interest rate expectations from close to 4.0% back to above 6% for the end of the year. The market is now pricing in a December base rate of 6.25-6.50%, meaning very few and small rate cuts could be in the pipeline from July.
The central bank will be able to discuss these considerations in more detail at the June policy meeting, but stronger hints for the second half of the year may be given today. The rationale for today's interest rate decision will be published at 3 pm, and a press conference by MNB Deputy Governor Barnabás Virág will start at the same time. We will report on these as usual.
Cover photo: Getty Images
