Hungarian central bank cuts base rate by 75bp to 8.25%

Hungarian central bank cuts base rate by 75bp to 8.25%
MNB deputy governor Barnabas Virag. / bne IntelliNews
By bne IntelliNews March 27, 2024

The Monetary Council cut the base rate by 75bp to 8.25% at its monthly rate-setting meeting on March 26. Policymakers had discussed three options, a 50bp, 75bp and 100bp cut, and decided unanimously on the 75bp one, deputy governor Barnabas Virag said after the rate decision, adding that the slower pace of easing was justified by increasing risk aversion.

A month ago, the MNB reduced the base rate by 100bp.

The continued strong and general disinflation allows a further reduction in the base rate, while the increasing financial market risk aversion justifies a slower pace than in February, according to the assessment of central bankers.

Domestic and external demand pressures in the Hungarian economy are low and have a disinflationary effect, policymakers said, adding that underlying inflation is driven by two opposing factors: the depreciation of the forint and the weaker cyclical position of the real economy.

Virag said tight monetary policy stance is still required, and financial market stability is key to achieving the inflation target sustainably.

The phase of monetary policy operating with large steps is concluded and monetary policy will enter a new phase, with the pace of interest rate cuts slowing in Q2, the deputy governor said

Current interest rate expectations of 6.5-7% by the end of H1 were realistic and this represents a stable, positive real interest rate environment, but considering the changes in the global risk environment, an increasingly careful approach to monetary policy is warranted in the second half of the year, he added.

MNB expects inflation to rise temporarily in the middle of the year, but annual average inflation for 2024 could be 0.5pp lower than the central bank's previous projection, ranging between 3.5-5%, which is set to fall to 2.5-3.5% in 2025. The MNB’s fresh inflation report forecast put GDP growth between 2-3% in 2024, which could accelerate to 3.5-4.5% next year and remain at 3-4% in 2026.