Hungary central bank steps on brakes, but does not halt rate cuts
The 25 basis point cut can be seen as a "tapering" of the interest rate cycle, as the central bank is not expected to ease further from July. Of course, the Monetary Council was not guided by the beauty of the interest rate cycle that is coming to an end when it decided to put the brakes on. Two weeks ago, it looked more likely that a final 50 basis point cut would come in June, only to be followed by occasional easing in the second half of the year.
Then market expectations shifted as the economic situation changed. The main concern for the MNB was not inflation, as the annual rate of increase in May was still lower than expected, although the CPI rose to 4.0% from 3.8%.
The rise in services prices may be a concern for the MNB, but overall the inflation picture has not worsened in the past month. Meanwhile, the situation on the financial markets has become turbulent again. The most spectacular part of this was the weakening of the forint, with the euro falling below 383 at the end of May, but in the second half of last week it was close to the 400 psychological level.
In this respect, it is particularly important that the global environment has generally deteriorated over the past month. As the Fed has again become more bearish on U.S. inflation developments, the rate cuts expected for this year have started to be priced out overseas. This has implications for emerging market interest rate policy.
All in all, the narrowing room for manoeuvre has allowed the central bank to decide to reduce the pace of interest rate cuts. A smaller rate hike in June could lead to a halt in July. The central bank has repeatedly given strong indications that the year-end interest rate will not be much lower than the one that will emerge by the end of the semester.
Analysts also see only one or two rate cuts possible before December, as with inflation expected to hover between 4 and 5% and US 10-year bond yields above 4%, it is unrealistic that the MNB can lower rates to the low end. In fact, there are some experts who believe that we will not see any rate cuts at all in the second half of the year. Thus, it is very likely that the current rate cut will bring the period of dynamic monetary easing to an end.
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