Following a pause in August, the MNB reduced the base rate once again at its latest rate-setting meeting in September. With the 25-basis point cut, the rate dropped to 6.5%. According to analysts, one more rate cut will likely occur this year before monetary easing continues in 2025.
The decision met expectations and had been priced in by the market, so it is hoped that it will not cause a larger movement. The decision was primarily supported by two factors: on the one hand, the favorable August inflation data, and on the other hand, the recent interest rate decisions of the major central banks, Gábor Regős said, commenting on the Monetary Council’s decision.
The senior economist from Gránit Alapkezelő said that, while the European Central Bank’s decision had been expected, it hadn’t been clear whether the Fed’s easing would be 25 or 50 basis points; that it went big created room for maneuvering for domestic monetary policy.
According to Regős, the perception of risk hindered the easing of monetary policy: the exchange rate of the forint was relatively (but not significantly) weak, and the budget deficit had also developed unfavorably in August. The risk assessment and the forint exchange rate may well be the factors determining the further framework for relaxing monetary policy in the remainder of this year.
The loosening of monetary policy is expected to be reflected in market interest rates sooner or later, the analyst said. This makes it easier for companies to finance their investments, for example. For this, however, it is necessary that, as the external environment improves and demand rises, it makes sense for companies to make investments.
“According to my expectations, the ECB will reduce its benchmark rate at least one, possibly two more times this year, while the Fed will reduce it two times. This enables the MNB to cut interest rates one more time this year so that by the end of the year, the base rate could be 6.25%,” Regős said.
“When it comes to further reductions, however, the development of risk assessment is important. The change in the budget balance, the relationship with the European Commission, and the issue of access to EU funds play a role in this,” he added.
If these develop favorably, then by the end of the year, the interest rate may be 25 basis points lower than the baseline expectation and could drop to 6%; if there is unfavorable news in these areas, it is more likely that the rate will remain at 6.5% at the end of the year, according to the analyst.
“The MNB did not cause any surprise with today’s interest rate cut after the August inflation data brought a positive surprise, and the Fed also acted in line with heightened expectations the previous week,” commented Péter Kiss, investment director of Amundi Fund Management, immediately after the cut.
“It was possible to do this in the relatively favorable international environment, but at the same time, careful communication still seems necessary, as the exchange rate of the forint against the euro is stuck in the weaker half of the trading range of the last period,” Kiss added.
The communication guidelines have not changed. In the statement following the decision, the MNB indicated: “The risks surrounding international and domestic disinflation, as well as the volatility of investor sentiment, justify a cautious and patient monetary policy looking ahead. The council continuously evaluates incoming macroeconomic data, inflation prospects, and the development of the risk environment, on the basis of which it will carefully, and data-driven, decide on the rate of the basic interest.”
Deputy governor Barnabás Virág emphasized several times in the background discussion following the meeting that the council members will have the option of maintaining interest rates or a modest (25 basis points) interest rate cut in the following meetings.
According to Virág, the current situation made it possible to reduce interest rates cautiously, hence the decision to reduce the base interest rate by 25 basis points. However, he emphasized that the MNB still sees that it has to make decisions in a rapidly changing macroeconomic, global financial market and geopolitical environment.
“We can’t sit back. We cannot declare victory over inflation too soon,” added Virág, who believes that a cautious, patient and disciplined monetary policy is still justified. “Our inflation forecast for next year has risen a bit compared to June,” he noted. Virág also said that despite this, disinflation continues, the background of which is the lower external cost environment and the more moderate retrospective repricing expected next year
The MNB has significantly worsened its forecast. The central bank now expects an inflation rate of 3.5-3.9% this year, 2.7-3.6% next year, and 2.5-3.5% in 2026. Economic growth may be 1-1.8% this year, 2.7-3.7% next year, and 3.5-4.5% in 2026. Overall, this year’s inflation forecast was reduced, and next year’s was raised slightly compared to the June forecast, the latter due to the increase in the transaction tax. Growth prospects for this year and next were reduced, while it was raised for 2026.
This article was first published in the Budapest Business Journal print issue of October 4, 2024.
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