ANALYST VIEW - Market assesses first rate meeting under new MNB chief
While leaving interest rates unchanged, the central bank has made significant changes to its economic forecasts, raising its inflation estimates and lowering its GDP growth projection for this year.
- For this year, the central bank staff forecasts an annual average inflation rate of 4.5-5.1%, instead of the 3.3-4.1% projected in December,
- and at the same time it has also raised its forecast for next year substantially to 2.9-3.9%, compared with the 2.5-3.5% range it had forecast in December.
- Meanwhile, the MNB staff also revised downwards its GDP growth forecast for this year to 1.9-2.9%, from the December forecast of 2.6-3.6%.
- At the same time, the growth forecast for next year has been raised slightly to 3.7-4.7% from 3.5-4.5% in December.
Moreover, inflation could easily be even higher. “The release indicated that upside risks surround the inflation forecast, with uncertainty stemming from geopolitical conflicts, escalating trade tensions and the emergence of risks of a slowdown in the US economy, among other factors,” highlighted Zoltán Varga, senior analyst at Equilor Investment.
In the European Union, the loosening of fiscal rules and the stimulus packages announced in recent weeks could boost economic growth after years of subdued growth. MNB Governor Mihály Varga said annual inflation in March is expected to be lower than in February.
Inflation is running higher than expected, and the central bank can contribute most effectively to easing the caution of economic agents and to kick-starting growth by achieving price stability, said Mihály Varga at the press conference after the rate decision. A tight monetary policy contributes to sustainable growth. Anchoring inflation expectations is key, Varga said. The Monetary Council is committed to achieving the inflation target. Tight monetary conditions, maintaining positive real interest rates are warranted.
Orsolya Nyeste, chief economist at Erste Bank, said in her analysis after the MNB's interest rate decision and Varga's press conference that the outcome and main messages of the MPC meeting were practically a non-event, and that interest rates will remain unchanged in the upcoming period.
We maintain our view, however, that later in the year, cautious rate reductions (one or two) cannot be excluded, but only if risk assessment factors improve and possible easing steps by major and regional central banks create some more room for the MNB to manoeuvre,
she added.
According to Márta Balog-Béki and Zoltán Árokszállási, economists at MBH Bank, the MNB will not be able to cut interest rates before the end of this year - and this is only likely to happen if the Fed is able to implement a substantial easing overseas. An interest rate cut could come when it is clear that inflation could return to the central bank's target range in the long term (and the market believes this). It is too early to say at this stage, MBH Bank experts said.
"The Monetary Council statement and Varga’s press conference can be considered hawkish. However, based on the immediate market reaction, not hawkish enough, said Péter Virovácz, chief economist at ING Bank. The forint exchange rate ended yesterday pretty much where it started the day.
Market expectations and pricing of the possibility of future rate hikes were exaggerated. The press conference was a reality check in this regard,
he added.
Governor Varga made it clear that while the Monetary Council is ready to change its stance if necessary (even by holding an ad-hoc meeting), based on the information currently available, the Monetary Council was unanimous in its decision at the March meeting and there was only one option on the table: to keep rates on hold, noted Virovácz. The new governor also reiterated what we have been hearing lately: the central bank is prepared to keep the interest rate at its recent level for the foreseeable future.
In relation to the updated GDP and CPI forecasts, the analyst pointed out that in contrast to previous press conferences with Deputy Governor Virág, Governor Varga did not shed too much light on the drivers behind the updated outlook.
"Reading between the lines, the inflation surprises and the higher-than-usual repricing at the beginning of the year could be behind the change in inflation forecasts. The weaker economic outlook could be due to the lack of external demand, weaker consumer and business confidence and further delays in new export capacity coming on stream," he said.
Regarding the alternative scenarios, the Monetary Council highlighted four main scenarios: rising trade tensions, deterioration in emerging market sentiment, easing of geopolitical tensions and fiscal stimulus in Europe.
In our view, the balance of these alternative scenarios points to upside risks to inflation and balanced risks to growth.
Analysts at OTP Bank said "the meeting would also have been an excellent opportunity for the MNB’s new management to communicate if it wanted to change the monetary policy of the past 12 years, during which the forint has been steadily weakening."
While OTP was expecting the base rate to remain on hold,
[...] had the central bank been worried about next year's inflation processes and the forint, the MNB might have also raised interest rates in a surprise move.
They maintain their view that the base rate will not be changed this year, admitting that this projection is in line with market pricing, but is more hawkish than the market consensus.
With Varga delivering "very similar messages" to those conveyed at recent post-meeting press briefings, OTP's economists assess the communication showing "strong continuity" in terms of monetary policy making with the previous management.
They also pointed out that the inflation outlook has worsened since the latest meeting (based on MNB’s own forecast as well).
"While this year’s strong price growth is surely outside the monetary transmission horizon,
it is yet to be seen whether the current policy rate will be sufficient to bring 2026 inflation in line with the target,
when the economy is recovering, wage growth is strong, and inflation expectations are elevated."
Admittedly, about EUR 5.5 billion of Covid-related QE measures will expire in 2025, and based on the MNB's communication, the maturing collateralized loans will not be renewed, which is a massive liquidity and monetary tightening, they concluded.
Cover photo (for illustration purposes only): Portfolio
