HU: Elevated level of expectations concerns MNB
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. It was the fifth pause in a row since the last cut in September 2024. Only one option was on the table and the decision was unanimous.
As usual, the statement of the monetary council was released at 3 p.m. and Deputy Governor Virag also hold a press conference at that time on the background of todays decision. Mr. Virg commented on the details of the January CPI figures which exceeded significantly the consensus and central banks forecast range too. He highlighted despite the one-off effects the generally higher repricing practice among market services and the still elevated levels of expectations increase the risk of a higher inflation path and also not in line with maintaining the price stability. The outlook is really hazy and it is not obvious that we could see the peak of the yearly headline figure.
The forward guidance relevantly did not change compared to the last meeting. Our updated forecast for the yearly average inflation is 5% currently, surrounded by significant upside risks. The demand driven side of repricing will be gradually fueled by the awakening consumption and additionally the recently announced welfare measures. In addition as Mr. Virgs presentation showed the inflation expectations and the central banks tolerance band started to diverge in 2021H2 and although a slow, step-by-step conversion in the last two years from July 2024 they began to decouple again. As a result the timing of a permanent return to the tolerance band (2-4 percent) remains uncertain. Besides the current good stance of the currency could leave MNB in wait and see mode.
In March the new Inflation Report will be published with the updated forecasts of the central bank and the decision will be made under the leadership for the first time with two new members in the council.