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Analysts expect MNB to cut base rate sharply below 1%

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Hungaryʼs policy rate is now likely to trough sharply below 1% as the central bank started its new easing cycle earlier than expected and demonstrated an explicitly dovish stance, London-based emerging markets economists said yesterday, according to Hungarian news agency MTI.

Analysts at JP Morgan said they now see the decision to cut the base rate by 15 bps to 1.2% this week as the first cut in a new rate-cutting cycle likely to last at least four-five months.

“It now looks to us like the MNB is aiming to sharply lower the policy rate. ... We therefore change our call for base rate cuts to 0.5% or lower from 1% or lower than we previously had.”

The pace of cuts will likely remain in steps of 10-15 bps, with a final cut of 10bp in August.

“While we previously expected at least 35 bps of rate cuts in this easing cycle, we now expect at least 85 bps of rate cuts,” including the 15 bps cut delivered this week, JP Morganʼs analysts said.

Economists at Morgan Stanley also said that as the cuts to the policy rate had come “a bit earlier” than they envisaged, and the clear dovish tilt to the MNB statement put the risks to their second-quarter target for the policy rate to trough at 1% to the downside.

Such a dovish playbook will serve the MNB well this year, but may well prove challenging when inflation turns. Easy global monetary conditions have made the MNBʼs job easier, but the economy has recovered, the labor market is tightening, core inflation is around 1.5% and house prices are firming. “Itʼs only a matter of time before inflation complicates the MNBʼs ultra-dovish stance,” Morgan Stanleyʼs London-based analysts added.

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