One step closer to the MNB's big decision, but we're not there yet
Quarter turn in December
The MNB surprised the market somewhat by providing a new rationale for maintaining the interest rate at 6.5%, a decision that had been taken for granted. According to the tweaked approach, which changes the outlook, the Monetary Council will now make decisions on a meeting-by-meeting basis, taking incoming data and the outlook into account. Most experts interpreted this as
the central bank leaving the door ajar to an interest rate cut.
Based on the data received over the past month, it is unlikely that the bank will cut interest rates on Tuesday. Instead, it is more likely that the bank will continue to prepare the market for the first step. Although inflation fell to 3.3% in December and core inflation to 3.8%, deeper analysis of the data indicating a decline in inflationary pressure revealed more worrying signs. This is not primarily because the inflation data exceeded the central bank's expectations, but because there was unexpected repricing of market services.
Furthermore, it should be highlighted that these CPI figures for still include an estimated impact of 1.0–1.5 percentage points from margin caps and voluntary price restrictions.
Due to the above uncertainties, analysts expect the Monetary Council to wait for the January inflation data before making a considered decision on interest rates, in order to get a picture of the extent of price adjustments at the beginning of the year. Although the central bank may have access to high-frequency data on this, it will probably wait at least another month before deciding on an interest rate cut, given the importance of initial price decisions (for example, last year's inflation surprise).
All of the analysts surveyed by Portfolio expect the base rate to remain at 6.5% at Tuesday's meeting. Therefore, it would be a big surprise if interest rates were to be lowered now.
Although a cut in interest rates is getting closer, we expect the base rate to remain at 6.50% at the first interest rate decision meeting of the year,
said Zoltán Árokszállási, head of MBH Bank's Analysis Centre.
With the situation around Greenland improving, markets are calming down, which has strengthened the forint and the MNB's room for manoeuvre has increased. It seems that if the MNB does not start cutting interest rates soon, this could strengthen the forint even further, as it would price out rate cut expectations to some extent, Árokszállási added.
We do not expect any significant changes in communication compared to December. The focus is likely to be on the interpretation of inflationary processes, said Zoltán Varga, an analyst at Equilor, in connection with Tuesday's decision.
When should we expect the first cut?
Much will depend on the January inflation data, which is due to be released in early February. If the data shows lower-than-expected or reassuringly low price adjustments, the central bank may start to make cautious interest rate cuts in February, Péter Kiss, investment director at Amundi, pointed out in response to our question. He added that, if the situation is unclear or the central bank requires further confirmation, it may wait for the data due in March.
According to Péter Virovácz, senior analyst at ING Bank, the December inflation data, which was released in early January, quickly slammed the door on interest rate cuts. He recalled that, even before the data was released, the MNB had indicated that the year-end data would be important, particularly with regard to inflation in services. From this point of view, the outcome was an unpleasant surprise. Not only was the rate of price increases higher than expected, but the structure of inflation also developed in an unfavourable way.
"We believe that it would be less risky if the Council considered lowering interest rates in March, when the latest Inflation Report is published, and once the extent of price adjustments at the beginning of the year is known," emphasised Mariann Trippon, an analyst at CIB Bank.
Retail inflation expectations, which are closely monitored by the central bank, have not fallen convincingly. This again points to a wait-and-see approach,
stressed Zsolt Becsey, an analyst at UniCredit Bank.
Currently, the vast majority of experts see room for two or three interest rate cuts of 25 basis points each in 2026, and then next year the benchmark rate could be cut to around 5% or even lower.
The March interest rate cut may be followed by another in June. After that, the MNB may adopt a wait-and-see approach: inflation in the second half of the year could be higher than in the first few months, even if the margin caps remain in place. The increased demand resulting from fiscal easing would also contribute to this, according to Zoltán Árokszállási.
The inflation outlook remains mixed, said Orsolya Nyeste, an analyst at Erste Bank. The spectacular disinflation at the beginning of the year will mainly be due to factors other than core inflation and the extremely supportive base effect, she added.
"We do not expect interest rate cuts in the first few months of the year," said Tamás Isépy, an economist at Századvég Economic Research. "Margin regulations and their expansion play a decisive role in favourable inflationary processes, and their possible withdrawal carries a significant inflationary risk." Isépy only expects the central bank to ease policy in the second half of the year.
An interest rate cut in February seems almost certain, unless the January inflation data provides the surprise of the century,
according to Péter Virovácz, who expects a second interest rate cut in March.
What will happen to the Hungarian forint if its support is removed?
The year 2025 was an exceptionally successful one for the Hungarian currency, the forint, which strengthened to a level not seen in a long time. One of the reasons for this was the high interest rate level. The question is whether the forint will remain strong even after a potential rate cut, given that the MNB is unlikely to risk more serious devaluation.
Zoltán Árokszállási emphasised that, even with the expected Fed interest rate cut and some further weakening of the dollar, a 6% benchmark interest rate would still be by far the most attractive in the region. With domestic inflation remaining stable, this could allow for further interest rate cuts in 2027. In other words, the relative position of the forint would not deteriorate significantly and would remain an attractive option for investors looking to speculate on interest rate differentials.
Orsolya Nyeste suggests that exchange rate developments may remain crucial for the central bank in the coming months, given the potential for increased volatility due to the ongoing acute geopolitical situation, approaching elections and fiscal risks.
According to Gábor Regős, the number and timing of interest rate cuts this year will largely be determined by the exchange rate of the forint, i.e. financial market stability. The expert at Gránit Fund Management notes that, as we saw in December, the exchange rate is sensitive to changes in the central bank's communication. This suggests that the stable exchange rate established by the central bank's management over the past year remains fragile. This fragility may be particularly evident in the heightened atmosphere before, and even more so during, the elections.
Most analysts do not expect the forint to weaken beyond 400 against the euro again in the coming months.
Put simply, if the Monetary Council acts with sufficient caution, it can cut interest rates while maintaining the stability of the currency and keeping the exchange rate within a relatively narrow range of 380–400.
Cover photo: Shutterstock
