Hungary c.bank provides rationale for its July rate decision

According to the MNB's statement issued after the interest rate decision, the central bank's "primary objective is to achieve and maintain price stability. Without compromising its primary objective, the central bank supports the maintenance of financial stability and the Government's policy on economic and environmental sustainability."

Protracted trade and geopolitical tensions continue to create an uncertain global economic environment.

The terms and expected real economic effects of concluded and prospective tariff agreements vary considerably from region to region. The spending stimulus programmes announced in the European Union and adopted in the United States could boost growth from next year.

Inflation moderated in most countries in the first half of this year, while the second quarter saw a slight acceleration in inflation dynamics. Looking ahead, the upside risks are posed by the upward impact of tariffs on inflation expectations, the continued rise in world food prices and the continued strong price dynamics in the services market. Energy price volatility has declined since the previous interest rate decision, the MNB writes.

In international financial markets, risk appetite is mainly shaped by developments related to tariff announcements and geopolitical conflicts. The main stock market indices and US long yields rose. The Federal Reserve's expected interest rate path has shifted slightly upwards, with market pricing suggesting two 25 basis point rate cuts this year. For the European Central Bank, markets are still pricing in a 25 basis point rate cut by the end of this year. Among the central banks in the region, the Polish central bank cut rates by 25 basis points last month, while the Czech and Romanian central banks left their interest rates unchanged, they add.

The Hungarian economy stagnated in the first quarter of 2025. With household consumption growing steadily, investment is showing a protracted decline, while the uncertain global market environment is generally curbing exports of manufactured goods. High frequency data also point to subdued performance in the second quarter. Retail sales and construction expanded modestly in May, while industrial production declined year-on-year. In the second half of the year, steadily rising consumption and normalising external demand point to a gradual pick-up in economic growth. The unemployment rate remains low, but the pace of wage growth slowed in May, the MNB stresses.

From next year, both internal and external factors will support an acceleration in growth.

Over the forecast horizon, rising real wages and government tax cuts both contribute to strong consumption dynamics, while exports are expected to expand faster as the European recovery and the ramp-up in capacity-intensive investment in recent years pick up.

Domestic lending continues to be characterised by a duality: in May, household lending continued to pick up, while corporate credit demand remained subdued. Improving household incomes, rising house prices and the impact of current and newly announced subsidised loan schemes may continue to drive household credit growth at a higher-than-expected pace this year and next, while the risk of house price overvaluation may also increase. Corporate lending is expected to turn around as the economy recovers and uncertainty eases. The capital and liquidity position of the domestic banking system is strong, and it is even capable of meeting substantially higher credit demand, they explain.

In June 2025, inflation rose to 4.6%, while core inflation eased to 4.4%. Official and voluntary price-containment measures have had a significant moderating effect, but strong corporate repricing remains outside this range. Retail inflation expectations remain at high levels, while corporate price expectations moderated in June.

Inflation is expected to remain above the tolerance band for the rest of the year.

The pace of price increases could fall permanently into the tolerance band in early 2026 and reach the 3% inflation target in early 2027. In a context of buoyant consumption, volatile commodity prices and strong wage dynamics, price stability can be achieved in a sustainable manner by ensuring tight monetary conditions.

The current account balance showed a deficit of €69 million in May, largely due to one-off items. In line with the recovery in domestic demand, the current account surplus will temporarily moderate slightly in 2025, but will gradually increase from the beginning of next year as external demand normalises and new investment output picks up.

The budget deficit could fall further in 2025 compared to previous years. The primary balance excluding interest expenditure could be close to balance over the entire projection horizon. The decline in government debt in 2025 is also significantly hampered by subdued economic growth. With the deficit gradually narrowing, the debt-to-GDP ratio could decline from 2026 onwards.

In the current economic circumstances, the central bank can contribute most effectively to easing the increased prudence of economic agents and to sustainable economic growth by achieving price stability and maintaining financial market stability. A tightly geared monetary policy contributes to maintaining financial market stability by ensuring positive real interest rates, anchoring inflation expectations in line with the central bank's objective and thereby achieving the inflation target in a sustainable manner, they say.

In line with the stability-oriented approach, the Monetary Council kept the base rate at 6.50% at its meeting today. The O/N deposit rate remained unchanged at 5.50% and the O/N lending rate at 7.50%.

In line with the gradual reduction in the excess liquidity of the banking system in the first half of this year, the Monetary Council decided to reduce the reserve requirement ratio from 10% to 8% from 1 August 2025. The non-interest-bearing part of the minimum reserve requirement will remain at 2.5% of the reserve base. Overall, this technical move has a neutral impact on the monetary transmission and does not imply a change in the continued tight stance of monetary policy, the central bank stresses.

The Monetary Council is committed to achieving the inflation target in a sustainable manner. The risks surrounding the inflation environment, as well as trade and geopolitical tensions, continue to call for a cautious and patient monetary policy stance. The Council considers that the maintenance of tight monetary conditions is warranted.

Cover photo (for illustration purposes only): Portfolio