The Monetary Council of the Hungarian National Bank (MNB) cut the base rate by 100 bps to 9% at its monthly rate-setting meeting on February 27 and lowered the symmetric interest rate corridor in tandem, bringing the O/N deposit rate to 8.00% and the O/N collateralized loan rate to 10.00%.

The decision was in line with forecasts, although many analysts thought the MNB would stick with a softer pace cut at 75 bps seen in the last four months. As expected, the forint weakened slightly after the decision, exceeding the 390 per euro level for the time since October, although it was trading slightly below that level in the coming days.

In a statement issued after the meeting, policymakers said stronger-than-expected deflation, improvement in the country's risk perception, a positive trend in the current account, and consistently low external and internal demand enabled the temporary acceleration of the base rate cut.

The better-than-expected January inflation data, calmer capital market developments, and a deteriorating growth outlook have tilted policymakers for a steeper cut, financial website Portfolio.hu commented.

Hungary’s economy has seen strong and general disinflation as headline CPI last month fell 1.7 pp on a monthly basis to 3.8%, below the MNB’s tolerance band and one of the lowest in the region.

For the full year, inflation rose to 17.6% in 2023 from 14.2%, the highest level in 26 years. In a statement issued after the meeting, rate-setters expect inflation to remain close to the upper bound of the tolerance band in the coming months, before rising temporarily in the middle of the year due to base effects and reach the MNB’s 4% tolerance band sustainably next year.

On economic growth, the MNB said rising real wages and moderating inflation will lead to a recovery in domestic demand and balanced economic growth. Weak European economic activity is holding back domestic exports, the MNB said, but with the pick-up in the production of new export capacities, Hungary’s share of export markets could increase.

The current account balance is expected to improve further in 2024 and the coming years, the MNB said, adding that the balance has reversed from a deficit of more than 8% in 2022 to a surplus of 0.2%.

As for the outlook, policymakers remained cautious, stressing that risks surrounding global disinflation and volatility in international investor sentiment warrant a careful approach and further decisions will be data-driven based on the incoming macro data, outlook on inflation, and the risk environment. These couple of lines were unchanged from the previous meetings.

At an online press conference, MNB Deputy Governor Barnabas Virag stressed that it is too early to declare victory over inflation and he also struck a cautious tone, implying that the 100bp cut on Tuesday was temporary.

Market's expectations that the base rate will drop to 6-7% by the end of the first half are realistic, he said. This could mean the MNB may slow the rate of easing in the coming months, Portfolio adds. The March inflation report will be especially important in assessing the rate at which interest rate cuts will continue in the second quarter, Virag said. The MNB will also publish its revised inflation and GDP targets next month.