The Hungarian National Bank (MNB) will leave the base rate unchanged at 13% at Tuesday’s rate-setting meeting but is likely to reduce the upper threshold of the interest rate corridor, the overnight lending rate, from 25% to 20%, according to analysts surveyed by financial website Portfolio on April 23.
The markets will be watching closely comments after the meeting, which could mark a turning point in monetary policy, and could directly impact the forint’s exchange rate, it added.
Last week MNB deputy governor Barnabas Virag flagged a reduction of the O/N lending rate, arguing that extreme risk scenarios have been priced out and that a wide interest corridor of 12.5% is no longer necessary.
The MNB raised the upper end of the interest rate corridor last October amid market turbulence, and at the same time introduced the 18% overnight deposit rate, which has become the reference rate. Since then, it accepted all offers by banks at daily tenders.
According to analysts, the MNB has probably tested market reactions before it actually embarks on a monetary easing cycle. The forint weakened sharply after Virag’s interview, erasing much of its gains of the past two months, slipping from 370 to 380 against the euro in hours. Despite the sell-off of the currency, the forint is still trading 5% stronger against the euro and is outperforming its regional peers, the Czech koruna and the Polish zloty, which gained 3% and below 1% in 2023, making the forint a popular carry-trade instrument.
The sharp reaction on the currency market is in contrast with that of the bond market, which is pricing in rate cuts from the second half as inflation – standing at three-fold the EU average in March at over 25% – is expected to come down.
Analysts expect the base rate and the O/N deposit rate to converge at 11% at the end of the year and fall further to 6% in 2024, Portfolio writes.
The markets will focus on comments of policymakers after the rate decision and hints for possible timing of actual rate cuts, ING Bank analyst Peter Virovacz said. Rate-setters could decide to reduce the O/N lending rate by as much as 7pp to 18% to signal to investors that the MNB sees conditions as ready to begin cutting rates as market risks have improved markedly.
Inflationary outlooks in April and May will be decisive in the decision of the MNB, which could start reducing the 18% rate in May, or June, he added.
The MNB needs to be extra cautious in its communication to ensure that the gradual easing does not cause market tensions, CIB Bank analyst Mariann Trippon noted.