Hungary Leaves Door Open to Bigger Rate Cuts as Inflation Eases
(Bloomberg) -- Hungary’s central bank signaled it will forge ahead with monetary easing and declined to rule out bigger interest-rate cuts from next month as inflation slows more than expected. The forint reversed gains.
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Deputy Governor Barnabas Virag said the benchmark rate, the highest in the European Union, will move into the single digits “in the near future” after the central bank lowered the benchmark rate by 75 basis points for a third month, to 10.75%.
Hungary has been cutting rates from a peak of 18% in May as lower energy prices and a collapse in domestic consumption helped tame inflation. Price-growth slowed more than expected to an annual 7.9% in November, prompting calls by Prime Minister Viktor Orban’s government for larger rate cuts to boost sluggish growth. The central bank has so far resisted, arguing that inflation was still too high.
But Virag flagged a shift, saying policymakers had considered a reduction in the 75 or 100 basis-point range on Tuesday — whereas a smaller half percentage-point cut was also on the table in November. The National Bank of Hungary will maintain a “cautious” course given geopolitical risks and an aim for sustainably low inflation, Virag said.
“The key interest rate will be in the single-digit in the near future,” Virag said, declining to spell out whether policymakers will opt for a full-percentage-point cut in January that would bring the key rate below 10%.
The forint, which had climbed as much as 0.5% against the euro after the decision for the moderate cut, reversed course to drop 0.1% after Virag’s comments. The Hungarian currency has underperformed all central European peers in the past month, depreciating 1.4% against the euro.
‘Possible Shift’
“While caution remained a buzzword, we’ve picked up some hints of a possible shift to more rapid easing in the coming months,” said Peter Virovacz, an economist at ING Bank Hungary. “The 100 basis point is definitely now a real option.”
The central bank delivered an improved inflation forecast, predicting a drop in the consumer price index to or below an annual 6% in December and toward 4% next year — the upper end of the central bank’s tolerance range, Virag said.
The average annual inflation rate may be between 4% and 5.5% in 2024, compared with a 4%-6% forecast earlier. In 2025, price growth may average between 2.5% and 3.5%.
The rapid drop in inflation has given way to one of the highest real interest rates globally in Hungary, widening policymakers’ bandwidth to cut.
While the EU’s decision this month to release more than €10 billion ($11 billion) in grants and loans earmarked for Hungary — about a third of the amount that was suspended over allegations of democratic backsliding and corruption — is positive for Hungary’s risk perception, the central bank said, it failed to trigger a sustained currency rally.
--With assistance from Greg Sullivan.
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