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The National Bank of Hungary today cut interest rates by 50bps for the second consecutive meeting, taking the base rate to 7.25%, in line with market consensus and our own pre-announcement expectations.
With today’s move well telegraphed in advance, the markets’ attention was on any forward guidance accompanying this latest decision once again. Unlike some other recent meetings, however, such guidance was not forthcoming in the policy statement this time around, but we do think a number of statements from Deputy Governor Virag are noteworthy. Specifically, he reiterated that the policy rate is likely to reach 6.75-7.00% in June, before adding that the room for subsequent easing would be “very limited”. All told, this broadly met market expectations that had looked for a more cautious approach to easing in the second half of the year.
As such, the reaction in markets was muted, with the forint little moved following these latest developments, an outcome we suspect will be welcomed by policymakers.
Turning first to the policy statement, this was largely a run back of the April messaging. The statement did note that headline inflation stood 3.7% YoY in April, a 0.1pp increase on the March reading, but went on to point out that this remains within the bank’s 3% ±1% tolerance band and is in line with the March Inflation projections. Similarly, policymakers also noted that core inflation declined further by 0.3pp to 4.1%, before highlighting that the pace of price increases would rise temporarily in the middle of 2024 due to the backward-looking pricing of market services and base effects.
Even so, the broadly unchanged messaging of the policy statement looks reasonable to us. With inflation dynamics largely evolving as predicted, the Bank seems content in sticking with its previously communicated easing path.
Indeed, this point was hammered home by Deputy Governor Virag in his press conference. He once again suggested that the policy rate is likely to reach 6.75-7.00% in June, consistent with a further 25bp or 50bp of cuts next month. More notably though, this guidance was accompanied by an indication that any room for cuts in the second half of the year was likely to be “very, very limited”. In our view, with disinflation continuing broadly as expected, there are now three key elements determining how much the NBH eases from here. These include the strength of the forint, external conditions, and relations between the central bank and the government. While the first two of these have arguably improved in recent weeks, a renewal in hostilities between the NBH and members of the government recently should see monetary policymakers remain somewhat hawkish. For now, we are holding onto our call for the NBH to deliver another 50bp of easing next month, but today’s comments by Virag underline how risks to this call are clearly skewed towards a more modest dose of easing, with the outlook for H2 looking even more uncertain. That said, with this latest guidance largely meeting market expectations the forint has managed to hold on to its recent gains, having now appreciated close to 2% against the euro since the previous policy decision on April 23rd.
Author:
Nick Rees, FX Market Analyst