The MNB is not backing down: tight monetary policy needed to combat inflation

"I did indeed hold talks with the head of the third-largest US commercial bank," said Mihály Varga, "but this had nothing to do with the agreement between the Hungarian government and the White House on the financial protective shield."

The whole year was characterised by downward revisions to growth expectations, and public finances had to adapt to this. I believe this is what happened, said Varga regarding the increase in the 2025 deficit target.

A government delegation held talks in the United States, which falls within the government's remit. Prior to the talks, the government sought the opinion of the central bank, as anything that strengthens stability benefits the country, said Varga, referring to the US 'financial shield'.

Over the past six months, we have seen the Hungarian currency, the forint, strengthen, appreciating by more than 6% against the euro since the beginning of the year and also strengthening against other regional currencies. At the same time, the governor said that changes in the financial market environment must be monitored continuously because stability is valuable in a changing environment and brings us closer to achieving price stability.

Mihály Varga pointed out that, as a result of the extension and expansion of margin caps, inflation may temporarily fall within the tolerance range, but the fight against inflation is not over. He considers it good news that the stronger exchange rate of the forint is gradually being reflected in inflation. From this perspective, it will be worth paying close attention to price adjustments at the beginning of the year.

The current account balance showed a surplus in September, and this is expected to remain high in the third quarter. According to the central bank's forecast, the external position may strengthen further from 2026 with the upturn in productive investments.

In the external inflationary environment, the upward risk is posed by supply chain disruptions and market service price dynamics, said Varga.

Varga says that third-quarter GDP data fell slightly short of the September inflation report forecast and market consensus. He emphasised that labour market tightness is easing due to weak economic conditions.

In the current environment, the central bank can contribute to sustainable economic growth by achieving price stability and maintaining financial market stability.

According to the MNB's expectations, growth may be stronger in the fourth quarter, with exports potentially joining consumption as one of the drivers of growth in 2026.

In recent weeks, the market environment has primarily been determined by US-China trade negotiations and the expected interest rate decisions of central banks. The MNB Governor pointed out that, due to the US government shutdown, only limited data has been available.

Among the major central banks, the Fed may continue to cut interest rates, albeit at a slower pace than previously expected. Meanwhile, the market does not anticipate further rate cuts by the ECB. Among domestic developments, underlying inflationary processes remain strong, although price control measures are pushing inflation down.

"The council remains committed to achieving its inflation target in a sustainable manner, which requires maintaining tight monetary conditions," said Mihány Varga. He added that, in the current market environment, currency market stability is key to reducing inflation expectations.

Thus, the central bank's main messages have not changed compared to recent months, and they continue to advocate a patient and cautious approach to monetary policy.