Economy 28 January 2025, 2:00pm

Hungary central bank leaves rates on hold

Portfolio

The National Bank of Hungary (MNB) has on Tuesday left its base rate unchanged at 6.50%, in line with expectations. Analysts polled by Portfolio thought that neither the inflation outlook, nor the situation of the forint exchange rate, nor the uncertain international environment would allow the central bank to cut interest rates.

The base rate has been at 6.5% since October, with the easing cycle halted mainly due to the forint exchange rate starting to weaken spectacularly. The euro was around 392 at the beginning of the autumn and has ventured north of 416 this year.

The weak forint is hurting not only because of financial stability risks: its impact was already reflected in inflation data in December, through higher prices for imported goods.

MNB Deputy Governor Barnabás Virág also suggested that this year's inflation could be closer to the upper end of the previous forecast range, which means that we could see a higher rate of inflation this year than last year's 3.7% annual average and even outside the central bank's 2-4% target range. And that would come as an extremely unpleasant surprise, given that last year's prices were also driven up by retrospective gross overpricing by service providers.

The central bank's caution is heightened by the fact that the global environment remains highly unpredictable and investor sentiment volatile. There is still a lot of uncertainty surrounding US President Donald Trump's trade policy ideas, so the impact on Europe's economy is still greatly uncertain.

The market believes that interest rate cuts could resume in the middle of the year, with the key policy rate falling to 5.75%-6.00% by the end of the year. At the same time, analysts pointed out that the unpredictable external and internal economic developments mean that it is not inconceivable that financial market pressures will prevent interest rate conditions from easing throughout the year.

In the past two years, the central bank has often played with the possibility in its communication of referring to a higher interest rate path than the market was pricing it at, thus showing its discipline. It would certainly do so again, but the change of leadership due in March will not allow it.

The Monetary Council's statement with the rationale for today's rate call will be published at 3 pm, and the background discussion with Barnabás Virág will start at the same time. We will report on these as usual.

Cover photo: Shutterstock