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The National Bank of Hungary announced a 75bp cut to the central bank base rate today, taking it to 12.25%. Whilst a plurality of economists had been calling for a 50bp cut to the main policy rate before today’s announcement, the range of expectations covered everything from 100bp of monetary easing through to no change at all.
Given this, the marginally larger-than-expected cut comes as only a modest surprise, especially with analysts suggesting that risks to consensus were skewed towards a larger cut given a rapid cooling of CPI inflation. That being said, having simplified their policy framework in September and now begun the process of easing the via the base rate this month, market attention was also closely focused on the accompanying communications for hints on the path forward for policy easing. Here the NBH did not provide clear guidance, though it noted that domestic real rates should rise gradually until the end of the year.
This suggests that the NBH will continue with relatively large rate cuts going forwards, though leaving the exact size open to change depending on how the data evolves.
Heading into today’s announcement, limited information from NBH speakers had left markets guessing on the potential policy decision. Indeed, the closest thing to pre-release guidance came from Deputy Governor Virag in his press conference after the September decision, where he said that policy easing would no longer be on “auto-pilot”, though he struck a broadly hawkish tone overall. As such, markets were braced for a reduction in the pace of easing now the emergency rate had been made redundant, with the NBH having previously trimmed effective rates in 100bp intervals.
Even so, whilst today’s cut of 75bps does represent a slowdown in the pace of policy easing, it represented a move that was more dovish than expected by markets, though most analysts had noted risks being tilted in this direction.
In this vein, the pace of recent disinflation has been notable in the Hungarian economy, and may have tipped the balance towards a larger-than-expected rate cut this month. Admittedly, September CPI inflation was still recorded at 12.2% YoY. But this is sharply down from the 16.4% reading from August, and monthly price growth has averaged just 0.3pp in the last six months of data. Most importantly, this means that on a 6-month annualised basis, September’s price growth was just 3.9%, consistent with the Monetary Council’s inflation target of 3% with a +/-1% tolerance band, if only just. Whilst having avoided commenting on policy easing specifically, a similar point that inflation would ease rapidly has been recognised by NBH speakers following the September meeting. Several noted that they expect inflation to fall into single digits by year end, and with NBH inflation forecasts predicting a 4.0-6.0% range for inflation in 2024, this does imply a need for relatively rapid policy easing.
Given the size of today’s rate cut, it was therefore not surprising to see an emphasis on strong disinflation dynamics reiterated in the monetary policy statement. Notably the central bank indicated that a cautious approach and a slower pace of interest rate cuts are warranted in view of the increasing external risks, suggesting that a return to 100bp rate cuts are unlikely.
But the statement also noted that domestic real interest rates turned positive in September, and crucially that they should continue to rise gradually until the end of the year. With inflation falling at a rapid pace, this would appear to suggest a continued series of 75bp cuts as most likely going forwards.
However, on this point, two comments from Deputy Governor Virag’s press conference also stood out. First, only rate cuts in 50, 75 and 100bp intervals were considered, reinforcing the notion that the Monetary Council will look to ease rapidly. Second though, was a suggestion that an 11% interest rate by year end was realistic. Whilst this would necessitate only a further 125bp of easing over the final two policy meetings of the year, it would still constitute faster than expected easing when compared to market implied projections. These had suggested roughly 150bp of easing was priced in by markets before today’s announcement. With the NBH already halfway to delivering that with today’s 75bp cut, we expect that the NBH will now deliver faster easing than markets have priced, and therefore that there is downside in store for the forint. Whilst the dovish tone of today’s announcement saw an initial rally in EURHUF, this has subsequently retraced in a somewhat surprising move, though implied policy rate expectations have barely shifted too.
If, as we expect, the NBH continues to deliver a series of large rate cuts into year-end however, the downwards readjustment rates should ultimately weigh on the forint in the process as carry positions continue to be unwound due to the earlier nature of NBH easing relative to DM peers.
Author:
Nick Rees, FX Market Analyst