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Today’s policy decision sees the National Bank of Hungary slow the pace of policy easing, delivering 50bps of rate cuts in line with market expectations, taking the base rate to 7.75%.
This marks the second successive step down in the pace of easing from the NBH since policymakers delivered a 100bp rate cut in February. While we expect the NBH to deliver further easing in the coming months, we are inclined to view today’s downshift in the context of recent comments from NBH Deputy Governor Virag, suggesting that monetary policy is now entering a “new phase”. This rhetoric was echoed in today’s communications, as was the Bank’s continued data dependence, with a note that economic conditions are evolving broadly in line with Bank staff forecasts. With Virag also having previously indicated that rates would fall to between 6.50-7.00% by the end of June, we now expect the current pace of cuts to be maintained over the next few months.
Our central base case looks for successive 50bps of easing at both the May and June meetings.
Heading into today’s decision, there was little doubt amongst sell-side economists that the NBH would slow the pace of easing to just 50bps. In keeping the Bank’s typical approach, a more gradual pace of easing moving forwards had been well telegraphed in advance to markets. Most notably, this was tied to risks of a weaker forint, with the possibility that this could in turn trigger a resurgence in imported inflation. Whilst it was arguably Deputy Governor Virag that offered the standout intervention in this regard, he has not been alone in these comments either. He has recently been joined by long standing ratesetter Gyula Pleschinger and Chief economist Zsolt Kuti, with both policymakers also warning of the risks stemming from a weaker forint. At first glance this may seem a little odd given that prior to today’s meeting the EURHUF rate was broadly in line with levels seen following the March policy meeting. But a recent bout of HUF weakness following an escalation of tensions in the Middle East serves to highlight that notable upside risks remain for both EURHUF, and the inflation outlook.
Given this view, we think the policy statement offered a handful of notable takeaways. First, the deterioration in risk conditions was noted with a suggestion that a “volatile risk environment continues to warrant a careful and patient approach to monetary policy”. This is consistent with our view that policymakers remain cognizant of geopolitical risks, particularly those that could weigh on the forint, despite currency risks themselves not getting a specific mention in today’s statement.
The second notable point is an explicit indication that the easing cycle has entered a new phase, with the policy statement signalling that “the Monetary Council is proceeding at a slower pace than before, and will take decisions on any further reductions in the base rate in a data-driven manner.” All told, this suggests to us that while inflation is due to rebound modestly in the coming months, provided that it continues to evolve in line with NBH forecasts, further policy easing in 50bp increments is likely.
With today’s decision meeting market expectations, the forint has been left largely unmoved, an outcome we suspect will be welcomed at the NBH given the aforementioned risks identified by policymakers.
All told, we expect EURHUF to track sideways until the start of Q3, at which point the combination of ECB rate cuts and a further slowdown in NBH easing should provide the necessary catalyst to see EURHUF break sustainably lower, an outcome that remains broadly in line with our April forecasts.
Author:
Nick Rees, FX Market Analyst