HU: Another pause in the rate cutting cycle in October

After reducing the policy rate to 6.50% in September, the Monetary Council decided to keep it unchanged this month. The outcome of todays meeting was in line with our expectation and the broad market consensus. The council members decided unanimously, as only the possibility of keeping rates unchanged had been on the table.

Both the press conference held by the other Deputy Governor, Csaba Kandracs emphasized worsening geopolitical environment and increased risk aversion reflected in the forint weakening and increased bond yields and spreads, recently. Meanwhile expectations for the Feds interest rate path have shifted upward by around 40 basis points since September. The September inflation stood at a level consistent with the central bank target. However, core inflation rose and the upside risks to inflation increased, as well. There were comments on the role of the forint exchange rate, as well: the impact of movements in foreign exchange markets is asymmetric: in the current environment, the costs are greater than the presumed benefits . Last weeks messages were also repeated: if warranted by the external environment and the inflation outlook, the base rate may remain at the current level for an extended period.

According to the councils forward guidance, the intensification of geopolitical conflicts has led to rises in energy prices and emerging market risk premia. As a result of these two effects, upside risks to inflation have increased. Looking ahead, a careful and patient approach to monetary policy is still warranted. Based on the incoming macroeconomic and financial market data, the Monetary Council will take decisions on the level of the base rate in a cautious and data-driven manner. In the Councils assessment, re-intensifying geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant a pause in cutting interest rates.

Based on today's communication, the central bank reinforced that they were ready to keep interest rates unchanged for a longer period, if necessary. At the same time, we think that the door remained open for further cautious monetary easing if the above factors improved. Thus, we stick to our previous forecast of an additional twenty-five basis points rate reduction to be carried out in December. The policy rate is set to stand at 6.25% at the year-end.