HU: Cautious stance of MNB remained

Instant Comment , 24. Sep.
Policy rate reduced to 6.50%

After a pause, seen in August, todays rate setting meeting of the MNB brought a rate reduction again. The policy rate was reduced by 25 basis points, to 6.50%. The decision was in line with our expectation and the consensus.

The forward guidance did not change: The Council is constantly assessing incoming macroeconomic data, the outlook for inflation and developments in the risk environment, based on which it will take decisions on the level of the base rate in a cautious and data-driven manner. The guidance therefore did not shift to a more dovish direction, Deputy Governor Virag kept emphasizing caution. Financial market developments remain volatile, with emerging markets being highly exposed. Meanwhile, inflationary expectations are decreasing only slowly and display more volatility than usual. Virag also noted that there was no need to overreact to the Fed's 50 basis point interest rate cut, this step - in itself - does not justify a change in the Hungarian central bank's communication and monetary policy. Looking ahead, a careful, patient, and data-driven monetary policy remains warranted.

The new Quarterly Report on Inflation will be released on Thursday and the most relevant projections were published today. Hungarys GDP is expected to grow by 1.01.8% in 2024, by 2.73.7% in 2025 and by 3.54.5% in 2026. Meanwhile, annual average inflation is to be between 3.5 and 3.9% this year, 2.7-3.6% in 2025 and 2.5-3.5% in 2026.

The central line of the MNBs GDP forecasts is in line with our predictions. Regarding the inflation forecast however, the MNBs expectation for 2025 is somewhat more optimistic than we think. Continued improvement of households consumption, strong wage outflow, and inflationary expectations that are not fully anchored may lead to a higher annual average inflation figure for 2025, in our view.

We kept our forecasts for the policy rate unchanged after todays rate decision. One or two 25 bps interest rate cuts are possible until the year-end. Next year - depending mostly on the development of inflation further slow normalization of interest rates is to continue, and the policy rate is to be reduced to 5-5.25% by the year-end.