The Monetary Council of the Hungarian National Bank (MNB) cut the reference overnight deposit rate by 100bp to 14%, which is now only 100bp above the base rate at 13%. The decision was in line with analysts’ projections. Policymakers also cut the O/N collateralised loan rate by 100bp to 16.50% for the fourth straight month by a 100bp clip at their monthly policy meeting on August 29.

In a statement released after the meeting, policymakers stressed that a cautious and gradual approach" to monetary policy was warranted in the current environment in order to achieve price stability,

The MNB is constantly assessing the effects of international financial market developments on the domestic risk environment, incoming macroeconomic data and developments in the outlook for inflation.

If the improvement in risk perceptions persists, the MNB will continue to close the gap between the interest rate conditions of one-day tenders and the base rate," according to the statement issued after the meeting.

The central bank introduced the quick deposit facility offered at daily tenders with an initial 18% rate, which represented a 5pp increase from the base rate in mid-October, to stem the decline of the forint. The MNB began its monetary loosening in May as inflation decelerated from its peak of 25.7% in January.

In the statement, central bankers noted that the decline in domestic inflation accelerated in July, falling 2.5pp to  17.6% in annual terms in July, due to a slowdown in the price dynamics of processed food and manufactured goods. Core inflation slowed 3.3pp to 17.5% in the same period and inflation expectations of both households and companies continued to drop.

Inflation is expected to decline to the single-digit range during the autumn and is expected to return to the central bank tolerance band of 4% in early 2025.

The markets were looking for future guidance on monetary policy for the period after September as there is one more 100bp rate cut priced in.

Deputy Governor Barnabas Virag said monetary policy would "enter a new phase" from September when the base rate and the quick deposit rate converge in September and stressed that inflation remained "public enemy number one".

He said the central bank's toolkit was expected to be streamlined, with instruments that "are no longer necessary" being removed, while those effectively supporting financial market stability, such as swaps and discount bills, remain.

He emphasised that monetary policy does not "run on autopilot" and added the MNB would take a data-driven approach and decide on interest conditions "step by step" after the base rate and the quick deposit rate converge in September at 13%.

According to the median forecasts by Hungarian analysts the base rate will drop to 10.5% at the end of 2023.

As early as next month, Hungary could see positive real interest rates, which could help achieve the inflation target, Virag said, adding that the gap between interest rates and inflation could be the highest in the region.

He confirmed that the central bank’s 2023 GDP forecast of 0-1.5% will be revised in next month’s Inflation Report but did not specify.

Prime Minister Viktor Orban in a radio interview said he would be pleased with a "plus zero" growth this year. The government’s official target remains at 1.5%, but Finance Minister Mihaly Varga said earlier that the government will review its macro forecasts next month.

When asked about consultation with the ECB on amending the Central Bank Law, Virag said a response from the Frankfurt-based institution "will come very soon".

Hungary has proposed to amend the law that would allow the MNB to operate with negative equity. The central bank is set to finish this year with an eyewatering HUF1.8-2 trillion (€4.7-5.2bn) deficit after raking up HUF400bn in losses in 2022.

According to Virag, international practice shows that negative equity is not an obstacle to the credibility of the central bank.

The forint traded steady against the euro after the rate cut with a gain of 0.6% at 381.5.