Hungary Hits Pause on Rate Cuts After 15 Straight Reductions

Hungary’s central bank has taken a breather after a streak of 15 consecutive rate cuts, opting to leave interest rates unchanged at its latest policy meeting. However, policymakers hinted that the pause may be temporary, with room for further "cautious" rate cuts in the near future.

This week, the central bank held the benchmark interest rate steady at 6.75%, a move widely anticipated by economists in a Bloomberg survey. Despite the pause, Hungary continues to boast the highest borrowing costs in the European Union.

The central bank’s rate-setting Monetary Council suggested that this pause might be short-lived. They are closely watching for opportunities to ease monetary policy further, with factors such as expected rate cuts by the U.S. Federal Reserve and the European Central Bank, local consumer price trends, risk assessments, and economic confidence playing key roles in the timing of their next move.

“There may be scope for cautiously lowering interest rates further in the coming period, depending on the expected interest rate policies of the world’s leading central banks, as well as developments in the domestic inflation outlook and changes in Hungary’s risk perception,” the Monetary Council stated.

The decision to pause was largely driven by inflation outpacing the central bank’s earlier forecasts, surpassing the 4% upper limit of its tolerance range. Complicating matters, the forint—critical to Hungary’s monetary policy due to its influence on inflation—has lagged behind regional currencies since last month’s rate cut.

Deputy Governor Barnabás Virág, speaking at a briefing, noted that inflation could return to within the 1-percentage-point range around the 3% target in the coming months. However, he emphasized that policymakers will keep a close eye on August data for signs of persistent price increases, particularly in core inflation, which excludes volatile food and energy prices.

Looking ahead, the Monetary Council will consider a 25 basis-point cut or no change at each of its meetings this year, with the possibility of one or two more quarter-point cuts by the end of 2024, according to Virág.

Economy Minister Márton Nagy, who is seen as a potential successor to Governor György Matolcsy when his term ends early next year, recently criticized the central bank’s approach. He likened the rate-setters to “cyclops” for their perceived singular focus on inflation at a time when the economy is struggling. Nagy has been a vocal advocate for a more relaxed monetary policy.