News & analysis

The National Bank of Hungary has cut rates by a further 25bp at their June interest rate announcement, meeting market expectations for the Monetary Council to take the main policy rate to 7.00%.

This latest cut marks a further slowdown in the pace of easing, with the Bank having cut rates by 50bps in May, and by 600bps in total since October 2023. That said, while today’s deceleration was broadly expected by markets, questions remain over whether this latest cut marks the end of policy easing in Hungary. On the one hand, the Bank downgraded its inflation projections for 2024, acknowledging that the inflation outlook has improved over the past quarter, suggesting to us that the prospect of further easing remains on the table.

On the other, when set against elevated external risks and a recent weakening in the forint, we don’t think that further rate cuts are a done deal either. Instead, this new approach should turn every meeting over the next few months into a live decision, with data and risk conditions set to determine the extent of any future easing on a meeting-by-meeting basis.

Examining today’s announcement in more detail, the NBH’s latest decision was in line with prior guidance from Deputy Governor Virag in May, suggesting that in his view the base rate should be within the 6.75-7.00% range by the end of June. Taking the Deputy Governor’s words at face value suggests that today’s decision was a choice between cutting by 25bps or 50bps. Like most economists though, we had expected the Bank to ease by just 25bps, with the recent deterioration in European risk sentiment and the associated HUF selloff tipping the balance towards a more cautious approach.

Admittedly, much of the forint’s recent weakness stemmed from the announcement of a snap election in France, rather than on developments in Hungary specifically, with the prospect of the far-right National Rally party claiming victory weighing on broad European risk sentiment.

However, while this has seen eurozone satellite currencies struggling across the board, in the period between the election announcement and today’s policy meeting HUF has been the second worst performing currency amongst the expanded majors after only the Colombian peso. This captures not only the forint’s sensitivity to eurozone conditions, but also the specific risk that another far right leader in Europe could embolden Hungarian Prime Minister Victor Orban’s anti-EU stance, necessitating caution from the NBH.

Policymakers implicitly acknowledged this backdrop in typical fashion, noting that “the volatile financial market environment, significant geopolitical tensions and the risks to the outlook for inflation continue to warrant a careful and patient approach”.

That said, while this justified a slowdown in the pace of easing, today’s decision did not deliver the hawkish guidance that some analysts had looked for. Instead, the Monetary Council downgraded its 2024 inflation projection from 3.5-5.0% to 3.0-4.5%, whilst also recognising that inflation developments have been more benign than anticipated.

Taken together, today’s NBH decision falls short of categorically calling an end to the NBH’s easing cycle, instead suggesting a relatively hawkish path for easing in Hungary moving forward. This view was broadly validated by Virag too, suggesting that the Bank would now be making a separate call on rate cuts each month.

With the NBH delivering only 25bps of easing today, and limiting its options to just small cuts or holds moving forwards, this significantly narrows the distribution for Hungarian rates. This reduction in uncertainty has seen a modest forint rally, with EURHUF sinking 0.25% to partially erase the gains of recent days. While the NBH hasn’t closed the door to further easing, their explicit incorporation of external market developments in their reaction function suggests the forint may be better insulated from deteriorating conditions in European markets moving forward.

After all, any such scenario will likely necessitate a more hawkish outcome from the NBH, leaving the forint with a better yield profile to buffer deteriorating risk conditions.



Nick Rees, FX Market Analyst


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