HU: Cautiousness prevails

Today, the policy rate remained unchanged at 6.50%. Additionally, the Monetary Council kept both the O/N deposit rate and the O/N lending rate stable at 5.50% and 7.50%. The decision was in line with the broad market consensus and our estimate.

The central bank released its latest forecasts for GDP and inflation before the publication of the new Quarterly Inflation Report due on Thursday. Annual average inflation is set to be 3.3-4.1% in 2025 and 2.5-3.5% in 2026 and 2027. In 2025, the expected inflation trajectory will move upwards, thus inflation will not return permanently to the central bank target of 3% until 2026. As for the new GDP projections, the economy is set to grow by 2.6-3.6% in 2025, 3.5-4.5% in 2026 and 2.5-3.5% in 2027. According to the MNB, this years subdued growth (around 0.5% annually) was due to factors beyond the scope of monetary policy (agriculture, German economic problems, postponed investments). From 2025 onwards, however, economic growth would become broader-based, and the economy is projected to enter a dynamic phase of growth from 2H 2025 again.

Regarding todays rate decision, the monetary council emphasized that risk aversion towards emerging markets has continued and increased volatility on the domestic markets remained. Thus, in accordance with the stability-oriented approach, they kept the base rate at 6.50% adding that this is appropriate from the viewpoint of price stability, financial market stability and growth. If warranted by the external environment and the inflation outlook, the base rate may remain at the current level for an extended period, leading to an increase in Hungarys relative interest spread.

Messages of this years last MPC meeting did not bring any surprises. Negative changes in risk assessment and the fragility of the forint justified the councils cautious approach. Meanwhile, short-term inflation risks partly because of the weaker forint have also increased, as it had been reflected in the higher inflation predictions for 2025, too. We continue to think that the next year should bring cautious rate reductions but only if the above risk assessment factors improve. The timing for the continuation of monetary easing remained uncertain.