The last interest rate decision of 2024 did not come as a surprise: the MNB did not touch the base rate, which remains at 6.5%. The central bank did not cut it at its previous meeting either, with the last base rate reduction of 25 basis points back in September. The overall picture had not changed significantly since the November interest rate decision meeting.
The decision was in line with analysts’ expectations. According to Dániel Molnár, senior macroeconomics analyst at Makronóm Intézet, the central bank’s decision did not come as a surprise, as it was expected that monetary conditions would not change at the last meeting of the year, similar to October and November.
“Although inflation accelerated in November, it was still slightly below expectations and within the central bank’s tolerance band. Although the rate of monetary deterioration may have increased further in December due to base effects, we expect a slowdown to occur again from the beginning of the year. For this reason, inflationary processes would have made it possible to ease monetary conditions,” he said.
However, Molnár continued, while the domestic situation created some room for maneuver, the international environment was generally unfavorable, similar to the previous months. The strengthening of the dollar, which occurred as a result of the economic policies expected from the incoming second Trump administration, created a turbulent financial market situation in emerging markets, which also weakened the forint exchange rate, but the intensification of geopolitical conflicts also had an impact in this direction. It may have been this monetary environment that ultimately prompted the central bank decision-makers to err on the side of caution.
“The central bank also highlighted in its statement that there is significant uncertainty regarding the interest rate and budget paths of the dominant economies, while geopolitical tensions also reduce the willingness to take risks in emerging markets, which in turn necessitates a cautious and patient approach,” he said.
In case the forint further weakens in reaction to the rate-cutting policy of the Federal Reserve in the United States, there will be no room for easing domestic interest rates at the beginning of next year.
“However, if the Fed continues to cut interest rates, the domestic base rate may gradually decrease further, according to our expectations, to 5.5% by the end of 2025,” Molnár predicted.
The MNB’s last decision of 2024 also coincided with the expectations of MBH Bank experts. As for this year’s monetary policy, MBH Bank analysts Zoltán Árokszállási and Márta Balogh-Béki wrote in a joint note that they expect inflation to return to the tolerance band permanently in 2025, but the issue of the forint exchange rate may still be a source of excitement. One of the MNB’s tools to stabilize the exchange rate may be maintaining the relative interest rate premium.
“We continue to expect that the MNB will be able to resume interest rate cuts sometime during the spring and that the base rate in Hungary may fall below 6% in the second half of 2025,” the pair concluded.
This year will also mark the start of a new era for the MNB. Mihály Varga, who was Minister of Finance in its various guises from March 7, 2013, to Dec. 31, 2024 (it was subsumed into the Ministry for National Economy from Jan. 1, 2025), will take over the reins at the central bank from March, replacing György Matolcsy who has been the governor since 2013.
“At his committee hearing at the end of last year, Varga emphasized the importance of a stable and predictable exchange rate; we hope that this will be realized in practice,” says Gábor Regős, head economist at Gránit Alapkezelő.
“At the beginning of his work as the central bank chairman, he must also gain the trust of the market in this position; his every step will be watched with keen eyes. Accordingly, I would not count on monetary policy easing in the first months of the new chairmanship,” Regős notes.
“The international interest rate environment and the development of Hungarian risk perception will be decisive for the subsequent interest rate path. According to my expectations, inflation will be less of an obstacle to Hungarian interest rate cuts. Accordingly, I expect that another easing will only take place at the end of summer or the beginning of autumn, so that the base rate will decrease to 6% by the end of the year,” he adds.
The MNB has also published its latest macroeconomic expectations. Economic growth is expected to come in at between 0.3-0.7% for 2024. This is a significant reduction compared to the September forecast but is not surprising given the weak third-quarter economic data. The MNB is forecasting growth of 2.6-3.6% in 2025, which is slightly lower than the previous forecast and 3.5-4.5% for 2026, the same as in the September forecast.
Regarding inflation, the central bank expects an average price increase of 3.6-3.7% for 2024 and forecasts an average price rise of 3.3-4.1% for 2025, which is about 0.5 percentage points higher than previously stated. The upward revision was mainly explained by the depreciation of the forint exchange rate and changes to the excise tax system.
This article was first published in the Budapest Business Journal print issue of January 10, 2025.
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