The Hungarian central bank's hands are tied - How long can the forint remain this strong?
Varga's first rate cut is yet to come
All of the analysts polled by Portfolio expect the current base rate of 6.5% to remain unchanged after Tuesday's Monetary Council meeting. This means that the conditions will not change.
Logically, the direction of change should be downward. Although inflation spiked at the beginning of the year and then fell, partly due to margin cap, economic growth was a major negative surprise in the first quarter. These factors suggest a possible interest rate cut, as inflation eases and the economy needs to recover.
However, there is still a lot of uncertainty. With inflation at 4.2%, it is still above the MNB's tolerance band (3% +/-1ppt) so it would be premature to ease. Furthermore, the long-term fate of the margin cap remains uncertain, which could affect the inflation outlook.
In addition to domestic factors, the global environment is not conducive to monetary easing. This is because tariff war tensions have not subsided yet, and US sovereign yields remain high.
The government's price-cutting measures have also been effective in the short term. bBut the question is how long they will remain in place,
said Péter Koncz, an analyst at Századvég, adding that yhis is one of the most pressing questions.
According to MBH Bank economists, the margin cap is likely to remain in place for longer than was previously announced — at least until the end of the summer, and possibly beyond. They also point out that, according to MNB data, the public's perception and expectations of inflation are very high, hovering around 8-10%.
Péter Virovácz, senior analyst at ING Bank in Budapest, said that the tone and stance of monetary policy will remain tight as the central bank's aim is to achieve its inflation target on a sustained basis. This would require a reduction in inflation expectations above all else. However, according to the analyst, the Monetary Council is in a difficult position as it is hard to clearly see the underlying inflation process due to a series of government measures and interventions.
Could rates be cut this year at all?
In recent months, we have also observed fluctuations in analysts' expectations and in forward rate agreements (FRAs). Sometimes one rate cut was on the cards, and at other times two. However, sometimes analysts saw no possibility of easing at all. Based on our recent market consensus, we should see a single 25-basis-point reduction before year-end. However, experts are suggesting that the central bank may not be able to lower the policy rate this year.
two analysts project no change in rates this year, i.e. the base rate to be standing at 6.5% even at the at of 2025.
Expectations for 2026 are more mixed. Some analysts now anticipate only one 25-basis-point rate cut next year, while others believe that up to four or five similar moves are possible.
The economists therefore believe that much will depend on the outcome of the margin cap. Péter Virovácz also emphasised that the cost of inflation, which has been artificially lowered by temporary economic policy instruments, will have to be paid at some point, potentially in 2026–27.
According to Virovácz,
this is why the 3% inflation target will be extremely difficult to achieve.
He believes that
loosening interest rate conditions is not an option for the the central bank this year.
Gábor Regős, an economist at Gránit Fund Management, added that the unfavourable risk perception of the country, which is partly due to the high budget deficit and the withholding of EU funds, carries the risk of a downgrade and is also against easing.
'We debated for a long time whether the MNB would hold or cut rates by the end of the year. In the end, however, we opted for the latter, particularly if second-quarter growth data is as weak as at the beginning of the year', said Éva Palócz, CEO of Kopint-Tárki.
The maintenance and extension of the margin cap has definitively closed the lid on the pressure cooker in which the upward pressure on prices is simmering,
she added.
Forint seen losing momentum shortly
Analysts were also asked what they expect the exchange rate of the Hungarian forint against the euro to be over the next year. The median forecasts were 396 and 420, respectively, which are both higher than the current level of 403.
there is not much room for the forint to strengthen, but if the direction reverses, there could be a substantial weakening.
The EUR/HUF exchange rate has stabilised at just above 400, which is slightly higher than last year's average, despite being somewhat stronger than at the end of the year.
a substantially weaker forint would probably jeopardise the achievement of the inflation target,
MBH Bank economists stressed.
According to Péter Virovácz, it would not make sense to cut interest rates this year because of the forint. The base rate is irrelevant for Hungarian market players due to interest-subsidised loans. However, a falling real interest rate would send a negative message to foreign investors, as it could cause the forint to weaken again. This would also affect inflation prospects.
"The forint exchange rate has been quite stable recently, but this level is not yet strong enough for easing," commented Gábor Regős, senior analyst at Gránit Fund Management.
Cover photo: Portfolio
