Central Bank Cuts Base Rate by 50 Basis Points

The Monetary Council of the National Bank of Hungary (MNB) cut the key ECB interest rate by 50 basis points to 7.75%, and lowered the two edges of the interest rate corridor by the same amount at its interest rate decision meeting on Tuesday.

At its most recent meeting in March, the board cut the base rate by 75 basis points to 8.25%, following easings of 100 basis points in February and 75 basis points in January.

In a background briefing after the latest rate-setting meeting, MNB vice president Barnabás Virág said that the "rapid-stepping phase" of monetary policy had come to an end, with the pace of rate cuts slowing in the second quarter and monetary policy entering a new phase.

According to a statement published on the central bank's website on Tuesday, the Monetary Council sees the inflation outlook as a reason to cut the base rate. In their assessment, the Hungarian economy is experiencing strong and generalized disinflation, growth is likely to accelerate in the second half of the year, and the country's risk perception is reinforced by high foreign exchange reserves and a sustained improvement in the current account balance. Gross public debt and the budget deficit could moderate this year, GDP could increase by 2.0-3.0%, and Hungary is expected to grow at a balanced pace from 2025 onwards.

They added that inflation in the euro area has also moderated, with weakening global demand and low commodity prices suggesting subdued inflation.

At the same time, international risk appetite has deteriorated since the March interest rate decision, with the short-term outlook for Europe mainly driven by downside risks. Continued weakness in the continent's economy may dampen Hungarian export performance, although capacity-increasing foreign direct investment may counteract this, and export market share may rise in the longer term, they added. 

The panel called for a cautious monetary policy stance in the coming months, given the risks surrounding global disinflation, volatile international investor sentiment and a sustained continuation of domestic disinflation. In their view, the inflation outlook warrants a slower pace of base rate cuts than in the past, while the volatile risk environment warrants a patient approach.

Monetary policy will continue to contribute to maintaining financial market stability by ensuring a positive real interest rate, the continuation of disinflation and the achievement of the inflation target. Macroeconomic data, the inflation outlook and developments in the risk environment will be assessed on an ongoing basis, and from April onwards, a data-driven decision on further reductions in the base rate will be taken at a slower pace than in the past, the statement said.