Policymakers Cut Central Bank Base Rate by 75 bp to 8.25%

MNB

The Monetary Council of the National Bank of Hungary (MNB) decided to cut the central bank base rate by 75 bp to 8.25% at a monthly policy meeting on Tuesday, according to a report by state news wire MTI.

The council also decided to lower the symmetric interest rate corridor in tandem, bringing the O/N deposit rate to 7.25% and the O/N collateralized loan rate to 9.25%.

At the previous policy meeting in February, the council had cut the base rate by 100 bp.

"Over the past few months, disinflation in the Hungarian economy has been stronger than expected, while external and domestic demand pressures have remained persistently low. However, in the volatile international sentiment, the risk premium on Hungarian assets has also risen recently," the council said in a statement released after the meeting.

"According to the assessment of the Monetary Council, the continued strong and general disinflation allows a further reduction in the base rate, while the increasing financial market risk aversion justifies a slower pace than in February," the policymakers added.

Risk Aversion Behind Slower Pace of Easing

At a press conference after the meeting, deputy governor Barnabás Virág said the slower pace of easing was justified by increasing risk aversion. He added that the policymakers had discussed three options, a 50 bp, 75 bp, and 100 bp cut, and decided unanimously on the 75 bp one.

The decision on Tuesday marks the end of a phase of monetary policy operating with "large steps" and the start of a new phase, he added.

He said the pace of rate cuts would slow in the second quarter, adding that maintaining a tight monetary policy stance was necessary. 

Financial stability plays a "key role" in the sustainable achievement of the inflation target, he said.

Virág said expectations for the base rate to reach 6.5%-7% at the end of the first half were "realistic based on information at present". In the second half of the year, an increasingly cautious monetary policy approach will be necessary with a view to changes in the global risk environment, he added.

He pointed to the slower pace of external inflation, "volatile" risk perceptions of emerging markets, the potential inflationary effect of geopolitical tensions, and an upward shift of the expected interest rate paths of big central banks among international risk factors. He acknowledged "strong and broad-based" domestic disinflation, but noted that the risk premium on Hungarian assets had risen recently. 

In the coming months, Virág said the council would take decisions on further base rate cuts and their optimal pace "in a data-driven manner".

MNB Lowers Annual Inflation Forecast

The policymakers discussed the central bank's latest quarterly Inflation Report at the meeting on Tuesday. In the report, to be published in full on Thursday, MNB lowered its forecast for 2024 average annual inflation to 3.5%-5% from 4%-5.5% in the previous report published in December. The central bank sees inflation falling to 2.5%-3.5% in 2025.

Virág said inflation would temporarily rise in the middle of 2024 because of retrospective pricing of market services and base effects. He added that the 3.0pc inflation target would be reached in a sustainable manner in 2025.

The fresh report forecasts GDP growth of 2%-3% in 2024 and augurs an acceleration to 3.5%-4.5% in 2025.

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