Hungary cenbank does not commit to rate cut cycle - Governor

'The minutes will soon reveal what factors we considered in today's decision and why we did not commit to a cycle of interest rate cuts,' the governor emphasised. He added that this practice is not far removed from that of the ECB.

'We did not consider it necessary to discuss a possible US financial shield with the government or the US Secretary of State. In our opinion, the strongest shield is the country's international reserves. If this is accompanied by other measures, however, we are more than happy, emphasised Varga.

In response to Márton Nagy's comments on the consolidation of the domestic banking market, Varga says that it is not the central bank's job to evaluate and assess government opinions; its role is to achieve and maintain price stability. He added that the central bank does not express an opinion on this issue.

We are constantly monitoring developments in global oil prices and exchange rates. These issues were discussed at today's Monetary Council meeting. The government has the authority to make decisions relating to the shutdown of the Druzhba oil pipeline. In response to a journalist's question, Varga said that "we do not consider it risky to cut interest rates in the current situation."

The MNB governor emphasised that

it is too early to prepare for the possible inflationary consequences of the pipeline shutdown.

He added that the current stable euro exchange rate means that Hungarian consumers can buy fuel 30–40 forints cheaper than a year ago.

Price stability can be achieved under tight monetary conditions, so a cautious and patient approach remains necessary, said Varga. Regarding the outlook, he noted that the Monetary Council continues to believe in prudent and data-driven decision-making, and considers it important to assess the impact of the measures taken.

The forint versus the euro is outperforming in the region and its volatility is approaching pre-Covid levels. Varga emphasises that maintaining stability in the foreign exchange market is key to moderating inflation expectations, and that a predictable FX market environment brings the MNB closer to achieving its inflation target.

Inflation continued to decline in January, with the figure of 2.1% annual rate being below the central bank's target and remaining in the lower half of the tolerance band (3% +/- 1ppt) . Core inflation also fell below 3%. It is expected that the rate of price increases will remain below the target in the coming months before temporarily rising back to the upper end of the tolerance band.

Varga says that the inflation target can be achieved in a sustainable manner in the second half of 2027. He adds that the effects of extending the price cap are currently being assessed and that their position on this will be published in the March Inflation Report.

Regarding price adjustments at the beginning of the year, he notes that there has not been such low willingness to adjust prices for years, except when inflation was below the central bank's target.

Overall, the governor emphasised that food inflation, as measured by the MNB, was negative in January, with food prices falling by 3%.

In recent weeks, emerging markets have proven resilient, with regional yield spreads narrowing relative to German government bonds. In the case of Hungarian bonds, this favourable trend has been ongoing since November. Looking ahead, Varga says there is room for further interest rate cuts in the region.

Regarding the outlook for the Hungarian economy, the head of the MNB emphasised that duality continues to exist. However, they also expect both external and internal factors to point towards improvement this year. The labour market remains resilient and unemployment is not rising.

"The Monetary Council did not decide today to start a cycle of interest rate cuts. We will continue to make decisions on a month-by-month basis, depending on the data we receive. We are not committing to any particular interest rate path," Varga emphasised.

The incoming data was consistent with the central bank's December forecast, which indicated an improvement in underlying inflation trends. This enabled a cautious reduction in the base rate to be decided upon, said Mihály Varga. The governor emphasised that this was the only proposal discussed.

As expected, the Monetary Council has today lowered the base rate by 25 basis points to 6.25%, which was the first cut after almost 18 months. The decision caused no surprise and the market reaction was muted.