By Gergely Szakacs
Pressure on Hungarian Central Bank
The National Bank of Hungary faces mounting pressure to rejuvenate the economy, as it confronts an imperative to accelerate its pace of rate cuts. After enduring a spell of weaker growth and inflation figures, since its previous meeting, the central bank is poised to announce a substantial rate cut of 100 basis points, lowering its base rate to 9% later this week, according to a recent Reuters poll.
The NBH spurned more substantial cuts last month, hesitating due to a surge in market risks following its mid-January guideline, which suggested that a sharp plunge in inflation might expedite easing.
Snapshot of Economic Indicators
Hungary’s headline inflation plummeted to an annual 3.8% in January from the European Union’s highest levels of over 25% a year ago. The economic recovery, which commenced in the third quarter, came to a grinding halt in the final three months of 2023.
Rates and Projections
Deputy Governor Barnabas Virag highlighted that the options for a 75-bp and 100-bp rate cut would both be on the table this week. The median forecast of a recent Reuters survey anticipates a 100-bp cut to 9%, although seven out of 17 economists are only projecting a 75-bp reduction. A 100-bp rate reduction would signify the NBH cutting its main rate in half, from 18% in an easing cycle kick-started last May, facilitated by a retreat in price growth and the recovery of the forint from its record lows hit in October 2022.
However, economists polled by Reuters foresee Hungary’s base rate at 6% by the end of 2024, indicating minimal room for rate cuts in the latter part of the year if the NBH manages to deliver on its guidance to lower its base rate to 6-7% by mid-year.
Implications and Challenges
Despite the anticipated rate cut, there are looming concerns regarding the possible rebound in inflation to 5.4% by year-end. This could constrict the scope for further aggressive cuts, potentially disrupting the bank’s strategy of maintaining interest rates above the level of price growth.
It remains to be seen how the Hungarian Central Bank navigates the delicate balance between stimulating economic growth and managing inflationary pressures, as it continues with its proposed rate cuts.
(Reporting by Gergely Szakacs; Editing by Nick Macfie)
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