The scale of monetary easing was the same as at the previous three rate-setting meetings. Rate-setters agreed that a cautious approach to monetary policy is warranted given risks surrounding global disinflation and volatility in international investor sentiment, which has been affected by media reports about Hungarian EU funds being frozen indefinitely.

Similar to earlier rate-setting meetings, they stressed that further decisions will be data-driven, as the Hungarian National Bank (MNB) will assess incoming macro data, the inflation outlook, and the development of the risk environment.

Over the past few months, disinflation in the Hungarian economy has been stronger than expected, the year-end figure dropped to 5.5% in December, the lowest in the region, from 25.7% in January. Inflation averaged 17.6% over the year, the highest in the EU.

The MNB predicts that disinflation is set to continue in 1Q24 and approach the upper bound of the 4% tolerance band in the spring months. Lower energy and raw material prices, disciplined monetary policy, measures to strengthen market competition, and subdued domestic demand supported the moderation of the price index.

The MNB’s inflation target is 4.0-5.5% for 2024, which is set to fall to 2.5-3.5% in the following two years, unchanged from the September inflation report.

Positive real interest rates will also help to continue disinflation and achieve the inflation target. As inflation approaches the central bank tolerance band, real interest rates are expected to decline.

Hungary’s current account balance-to-GDP ratio improved by more than 8% last year, the highest among EU members, and posted a surplus for the year.  The trends will continue with new added export capacities from the net inflow of EU funds, which will strengthen net lending capacities, according to the statement.

Hungary's recession ended in Q3 2023 after four consecutive quarters of contraction, the longest decline since 1995.

Rate-setters announced changes in the monetary toolkit. The long-term deposit facility will be discontinued from January 31, while the use of the swap facility providing foreign currency liquidity will be continued.

At the press conference following the decision, MNB deputy governor Barnabas Virag said that economic fundamentals, the decline in inflation and the improvement in the current account balance would have allowed for a larger cut, but the financial market developments of recent days have justified caution.

Virag was referring to press reports speculating that EU leaders would take a tougher stance against Budapest for blocking key foreign policy decisions. This news was later refuted, but overall there are growing geopolitical risks associated with Prime Minister Viktor Orban's go-it-alone strategy, which has alienated Western allies. A point of weakness is Hungary's budget deficit, which this year is expected to be 5% of GDP.

Virag said that as in the previous month, the MNB also weighed the option of a 100bp rate cut, but unlike last month some policymakers supported a steeper cut, hence the decision on the 75bp easing was not unanimous.

Probably these two options will be on the table next month, he continued, adding that the pace of rate cuts will depend on how MNB will perceive incoming risks. The Monetary Council will remain data-driven in its decision, he asserted.

The forint firmed 0.8% to 386.5 versus the euro from a three-month low of 390.