Cautious, Data-Driven Monetary Policy

The Monetary Council of the National Bank of Hungary (MNB) decided to leave the central bank base rate on hold at 5.50% at a monthly policy meeting this week.

According to an analyst, the central bank continues to pursue a cautious, data-driven monetary policy, which is currently resulting in a wait-and-see approach. In a statement released after the meeting, the Council said that "maintaining the current interest rate conditions is necessary to achieve the inflation target in a sustainable manner."

The policy makers added that "the high level of energy prices, the rising yield environment, as well as the uncertainty surrounding the global economic and financial market outlook warrant a careful approach to monetary policy."

Looking ahead, the Council said Hungary's risk assessment would be influenced mainly by the fiscal path and expectations regarding the adoption of the euro, as well as the external market environment. They acknowledged the impact of economic policy measures and their market reception on the room for maneuver of monetary policy. "The Council is constantly assessing the inflation outlook, global developments, and Hungary's risk premia, based on which it will take decisions on the level of the base rate in a cautious and data-driven manner," the Council added.

At a press conference after the meeting, central bank governor Mihaly Varga said that the Council had taken into account MNB's new 2.5% inflation target – in effect from January 1, 2028 – weighing the 5-8-quarter horizon for monetary policy. He noted that the forint's exchange rate had moved in a stronger range in recent months, adding that that the stability of the FX market supported the anchoring of inflation expectations and contributed to achieving the mid-term inflation target.

He added that the central bank would support the government's economic policy, in line with its mandate, as long as it did not put its primary task, to achieve price stability, at risk.
He said Hungary could enter the ERM-2 – the "waiting room" for the euro – "relatively quickly", but adopting the common currency would require "serious preparations".

According to analysts at MBH Bank, despite the favorable inflation data, a cautious monetary policy remains warranted, as price increases may accelerate again in the coming months. Rising energy prices, the impact of the summer drought on agriculture, and the 2027 budget measures could all play a role in this. The planned phase-out of the price cap, as well as certain tax increases, also pose upside inflation risks. The international environment is also not conducive to interest rate cuts, as expectations of rate hikes have strengthened in both advanced economies and regional countries. MBH Bank therefore does not expect any further rate cuts this year.

For János Nagy, a macroeconomic analyst at Erste, the decision to leave interest rates unchanged came as no surprise. Although Hungary currently has one of the lowest inflation rates in the European Union, price increases could accelerate again in the coming period. According to the analyst, a further interest rate cut would require a decline in energy prices and bond yields in developed markets, as well as the successful implementation of fiscal consolidation. Erste expects the central bank to cut the base rate again no sooner than the second quarter of 2027.

Amundi believes that domestic economic conditions alone would already allow for monetary easing, but external uncertainties and the phasing out of the price margin cap justify a wait-and-see approach. The firm believes that next year’s budget deficit, projected at 4.9%, and better-than-expected inflation trends could allow for a more dovish tone from the central bank. According to Amundi’s forecast, the MNB may leave the base rate unchanged through the end of the year, but quarterly cuts of 25 basis points could follow in 2027.

Dávid Németh, senior analyst at K&H, is of the view that low inflation alone would provide an opportunity for an interest rate cut, and the risk premium on Hungarian financial instruments is also developing favorably. However, in line with its previous communications, the central bank continues to pursue a cautious, data-driven monetary policy, which is currently resulting in a wait-and-see approach. According to the expert, another rate cut is unlikely in 2026, but the possibility of monetary easing could reopen in 2027.