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The National Bank of Hungary cut rates by 75bps at today’s meeting, taking the base rate to 8.25%, in line with the market consensus and our forecast.
The decision marks a step down in the pace of rate cuts following a 100bp reduction in the policy rate last month, albeit not one that is influential for markets as it unlikely marks a continued slowdown in the pace of easing due to more inflationary domestic conditions. Instead, the decision to decelerate the easing cycle was influenced by the ongoing row with the government, and the resulting selloff in the forint. The former has seen additional risk premia priced into Hungarian assets, while the latter risks stoking imported inflation, with both weighing in favour of slower easing in the eye of NBH policymakers. As such, FX markets broadly welcomed today’s smaller rate cut, with the forint rallying modestly on the announcement. Given risks of further currency weakness looking forward, we now expect this pace of easing to be continued, before a slowdown from policymakers later in the year, as rates begin to approach more neutral levels.
Whilst most economists had predicted a 75bp cut in advance of today’s decision, opinions were admittedly split, with a range of economist views looking for anything between 25bp and 100bp in today’s announcement. Certainly domestic economic conditions continued to weigh in favour of rapid easing. Having fallen to 3.8% YoY in January, followed by a below expectations print of 3.7% last month, inflation has now printed within the NBH’s 3±1% tolerance band for two consecutive releases. Growth meanwhile remains weak, having flatlined in the fourth quarter of 2023, suggesting little reason to fear a resurgence of inflation pressures stemming from domestic economic conditions. This was seemingly recognised by the NBH in today’s policy statement too. Whilst noting that inflation will temporarily rise in the middle of this year due to the backward-looking pricing of market services and base effects, policymakers also lowered their expectations for price growth, and suggested that inflation would be between 2.5 and 3.5% in 2025 and 2026. All told this continues to suggest that the Monetary Council sees policy as overly tight, warranting a large cut at this juncture, with more likely to follow over the next few months.
That said, Deputy Governor Virag had also described the step up to 100bp of easing last month as temporary, meaning a repeat this month was far from a done deal in any case, even absent other concerns. On this occasion however, two notable considerations also weighed in favour of a smaller rate cut today. First was the ongoing spat over a proposed law change that poses risks to the central bank’s independence. NBH policymakers have proven averse to dovish policy moves under similar scenarios as recently as January. On that occasion the Monetary Council surprised markets with a 75bp cut, despite having telegraphed a 100bp cut prior to the announcement. While policymakers did not highlight this explicitly in today’s communications, they did note that the risk premium on Hungarian assets has risen recently, with the increased financial market risk aversion justifying a slower pace than in February.
The second factor favouring a slower pace of easing is the recent forint weakness. In part this is still a consequence of tensions between the NBH and the government, but it was also the result of February’s decision to accelerate the pace of rate cuts. This too was highlighted as an upside risk for inflation is today’s policy statement, again suggestive that this weighed against a more aggressive policy move. If this is the case, we suspect policymakers will be satisfied with the market reaction. The forint strengthened modestly on the back of today’s easing slowdown. Whilst we continue to expect a slow grind higher for EURHUF in the coming months as forint carry protection is eroded by further rate cuts, for now, the fading risk of faster easing is seeing a modest bounce for HUF.
Author:
Nick Rees, FX Market Analyst