Hungary central bank releases rationale for rate cut

The National Bank of Hungary (MNB) has lowered its benchmark interest rate for the first time since autumn 2024. This was in line with expectations, with both the market and experts agreeing that the time was right for monetary easing. As is customary, the central bank published its reasoning an hour after the decision was made. It said

favourable developments in underlying inflation and the stability of financial markets allowed for a cautious reduction in interest rates.

At the same time, the forward guidance remained cautious. The central bank emphasised the importance of strict monetary policy and data-driven interest rate decisions.

The statement is as follows (highlighting by Portfolio):

The outlook for growth in the global economy and international investor sentiment are both exposed to prolonged trade and geopolitical tensions. However, emerging markets have so far shown resilience against global financial market volatility. Globally, inflation is moderating slowly. In the euro area, inflation was close to the European Central Bank’s target in recent months.

Based on market pricing, the Federal Reserve may reduce its target range for the federal funds rate two times in 2026. Markets expect the European Central Bank to keep the policy rate unchanged. According to markets and analysts’ expectations, the regional interest rate environment may also decline further in upcoming quarters.

Hungary’s GDP rose by 0.7 percent in 2025 Q4. Economic growth for 2025 overall stood at 0.4 percent year-on-year. Hungary’s real economy is still characterised by duality. According to the macroeconomic data received since the previous interest rate decision, retail sales continued to grow, while industrial production remained subdued. The tightness of the labour market has eased gradually in recent quarters. The unemployment rate remains low in a historical comparison.

The subdued growth in 2025 also has an impact on this year. From this year onwards, however, both internal and external factors contribute to the pick-up in growth. Due to rising real wages and the government’s income-increasing measures for households, consumption will support growth over the entire forecast horizon. At the same time, high budgetary expenditure will make it more difficult to reduce the public debt-to-GDP ratio. In addition to the gradual recovery of Hungary’s export markets, the capacity-increasing investment projects of recent years also support the expansion of industrial exports. On an annual average, the current account surplus remains steadily around 2 percent of GDP.

In January 2026, inflation and core inflation fell to 2.1 percent and 2.7 percent, respectively. Except for tradables, all main product groups contributed to the decline in price dynamics. January repricing in market services was at its lowest level observed in recent years. Incoming data and the subdued January repricings were in line with the Bank’s December forecast regarding improving underlying inflation. The price margin restrictions currently in effect have been extended until the end of May. Over the course of the past half year, companies’ price expectations showed subdued dynamics overall, while households’ inflation expectations stagnated.

The general improvement in the external cost environment and the pass-through of a stronger forint into purchase prices support disinflation. According to the MNB’s forecast, the rate of price increases will remain below the 3 percent inflation target in the coming months, before temporarily rising close to the tolerance band’s upper bound. According to the December Inflation Report, the 3 percent inflation target may be achieved in a sustainable manner in 2027 H2. In the Monetary Council’s assessment, the inflation outlook is surrounded by balanced risks.

In the current economic situation, maintaining the stability of the foreign exchange market is of key importance in reducing inflation expectations.

In the Monetary Council’s assessment, favourable developments in underlying inflation and the stability of financial markets allowed for a cautious reduction in interest rates. The central bank will continue to ensure positive real interest rates in order to achieve the inflation target in a sustainable manner.

The Monetary Council reduced the base rate by 25 basis points to 6.25 percent at today’s meeting. The O/N deposit rate and the O/N lending rate decreased to 5.25 percent and 7.25 percent, respectively.

The Monetary Council is committed to the achievement of the inflation target in a sustainable manner. A careful and patient approach to monetary policy remains necessary due to risks to the inflation outlook. In the Council’s assessment, price stability can be achieved through tight monetary conditions. The Council is constantly assessing the impact of incoming macroeconomic data and financial market developments on the inflation outlook, based on which

it will take decisions on the level of the base rate in a cautious and data-driven manner from meeting to meeting.

Cover photo: Portfolio