Hungary's central bank cuts base rate by 75bp

Hungary's central bank cuts base rate by 75bp
MNB Deputy Governor Barnabas Virag giving details of the MNB's rate-setting meeting. / bne IntelliNews
By Tamas Csonka in Budapest October 25, 2023

After five straight months of 100bp cuts in the overnight (O/N) rate, the Monetary Council of the Hungarian National Bank (MNB) cut the central bank base rate by 75bp to 12.25% at a monthly policy meeting on October 24. The MNB is the second Central European central bank to cut the base rate since the Polish central bank's surprise cut last month before the general election.

Prior to the meeting, analysts' poll ranged from 50-100bp, with the consensus was 50bp.

Rate-setters lowered the symmetric interest rate corridor in tandem, bringing the O/N deposit rate to 11.25% and the O/N collateralised loan rate to 13.25%.

"Strong disinflation and a reduction in the country's vulnerability allow the MNB to continue shaping monetary conditions by lowering the base rate," the Monetary Council said in a statement published after the meeting.  At the same time, a cautious approach and a slower pace of interest rate cuts are warranted in view of the increasing external risks, they added.

Speaking after the meeting MNB deputy governor Barnabas Virag stressed that MNB "cannot sit back" even as inflation retreats and has to pursue a strong disinflationary policy by keeping real interests high, a rather hawkish tone as the government officials have piled pressure on the central bank to speed up rate cuts to bring down borrowing costs to stimulate lending and consumption.

Risks surrounding global disinflation and volatility in international investor sentiment warrant a careful approach to monetary policy, he added.

Rising yields and geopolitical tensions have led to risk aversion in global financial markets, according to Virag.

After a decade, real interest rates have returned to the world's economic centres – the United States, the Eurozone, and China – which led to capital outflows from emerging countries to developed ones. These effects can be mitigated by emerging economies by creating a positive real interest rate environment, which is both a global financial market characteristic and necessary to continue the disinflationary path.

With annualised inflation decelerating to 12.2% in September from 16.6% in August, the retrospective real interest rate turned positive in September and is expected to gradually rise by the end of the year as inflation decreases.

Annual inflation is expected to reach 7-8% at the end of 2023, and the consumer price index is expected to return to the central bank tolerance band in 2025. Annual inflation may fluctuate between 17.6-18.1% in 2023, 4.0-6.0% in 2024 and 2.5-3.5% in 2025m, according to its forecast

On the real economy, Virag stated that recent high-frequency data shows that after four consecutive quarters of decline on a quarterly basis, Hungary may have exited from a recession in Q3.

In the past six months, external balance indicators have improved rapidly as energy prices eased.

Last month, the MNB overhauled its monetary toolkit, as it phased out the one-day deposit instrument, which served as the effective rate between October 2022 and September 2023, and its reserve account became the main sterilisation instrument.

The central bank will take a step-by-step decision on interest rates based on a careful approach, depending on incoming data, factors affecting the inflation path and developments in the risk environment, Virag said.

The forint weakened slightly after the decision as investors digested the MNB's move. The EUR/HUF moved from 381.9 to over 383.