Economy 21 May 2024, 4:17pm

There is no need to hurry with interest rate cuts - Hungarian c.banker

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The Hungarian central bank (MNB) has lowered the base rate by another half percentage point at its monthly policy meeting on Tuesday, bringing the benchmark rate down to 7.25%. MNB Deputy Governor Barnabás Virág spoke about the considerations behind the decision and the outlook. The central bank's communication hasn't changed much since April, continuing to emphasise the great caution it is trying to apply when carrying out relatively brisk rate cuts. Virág was very cautious when addressing the outlook for the second half of the year, saying only that "there is no hurry", meaning that the second half is likely to see much less easing.

Cannot sit back

The global economic situation continues to require a cautious and patient monetary policy, and financial stability remains an important consideration for interest rate policy, said Barnabás Virág.

The key messages of the central bank include:

Global risk appetite has improved since the April policy meeting.
Accelerating economic growth, the historically high foreign exchange reserves, a persistent improvement in the current account balance, and a cautious approach to monetary policy have contributed to an improvement in Hungary's risk perception.
We cannot sit back, as the volatile financial market environment and risks to the inflation outlook continue to require a cautious and patient approach.
Preserving financial stability remains a key priority.
The Council is constantly assessing incoming macroeconomic data, the outlook for inflation and developments in the risk environment and will take decisions on any further reductions in the base rate in a cautious and data-driven manner.

Tight Fed policy makes things difficult for emerging markets

The U.S. Federal Reserve's s later-than-expected start to interest rate cuts is complicating the situation for emerging markets, justifying a cautious approach to monetary policy.

Our current account balance is in surplus and economic growth has gained momentum. The disinflationary process remains a priority due to the pricing behaviour of the services sector.

Key takeaways - macro outlook

Inflation has returned to low levels globally, but high price dynamics in services hampers disinflation.
Market pricings suggest that the Fed will start to lower rates later than the European Central Bank. The divergence stemming from the persistently higher US rate environment could lead to increased volatility on emerging markets.
The Hungarian economy grew more dynamically in the first quarter of 2024 and is likely to accelerate further in Q2.
The marked increase in real wages, which started last September, is expected to continue this year, as well. Cautionary motives have started to ease.
The current account balance showed a new all-time high in March, beating expectations.
The central bank needs to focus on disinflation and achieving price stability in a sustainable manner. The Council closely monitors the pricing dynamics in the services sector.

In several sectors, pricing decisions have been made retrospectively, a harmful practice that slows and stalls the decline in inflation, said Virág, presenting a graph showing the composition of services inflation:

The Hungarian economy is recovering

GDP growth in Q2 on an annualised basis could be higher than in Q1. According to the central bank's short-term GDP forecast, the economy will continue to recover.

Achieving the budget deficit target is important

Among the risks, the central bank highlights the development of the external and internal balance, including the achievement of the budget deficit target.

The main message remains that the uncertainty in the external and internal economic environment warrants a cautious policy stance, i.e. the central bank is trying to take the edge off interest rate cuts by emphasising risk sensitivity.

A "map" of monetary policy

Virág assessed the scope for monetary policy in the light of international and domestic factors.

Among the international factors, the strong disinflation, the stubbornness of services inflation, and the uncertainty of risk appetite were emphasised.

There is no hurry

By the end of June, the base rate will be 6.75%-7.00% (i.e. we should expect a cut of 25 or 50 basis points in June), but Barnabás Virág declined to give any indication of the year-end interest rate level. This will be announced in the light of the June inflation report. However, he noted that "there is no hurry", confirming expectations that interest rate cuts will slow in the second half of the year. However, he did not comment on the market's year-end pricing of 6.25%, nor on the strength of the ex-post positive real interest rate rule (which also implies a benchmark rate of at least around 6% by the end of the year).

Today's decision was unanimous, with only the possibility of a 50 basis point rate cut discussed by the Monetary Council.