Hungary Resumes Monetary Easing Following Rate Cuts by Fed and ECB

After taking only a brief pause, the National Bank of Hungary (NBH) returned to its monetary easing path in September, cutting its key interest rate once again. The bank's latest forward guidance suggests a steady outlook on future rates, further fueling market expectations for another rate cut before the year is out.

Hungary's decision to resume easing comes after a slowdown in domestic inflation and recent rate cuts by major central banks like the Federal Reserve and the European Central Bank (ECB), which provided more flexibility for Hungarian policymakers.

This week, the NBH lowered its key interest rate by a quarter-point to 6.5%, aligning with predictions from all 24 economists surveyed by Bloomberg. The move followed a pause in August, which had capped 15 consecutive months of rate cuts.

In August, the NBH had already set the stage for its latest move, pointing to four main factors that would shape its rate-setting decision. First, inflation data for August showed continued disinflation, which helped improve short-term inflation expectations. Additionally, interest rates in developed markets, including the eurozone and the US, had fallen, with the ECB cutting rates by 25 basis points and the Fed by 50.

Hungary's risk perception has also improved, though it remains volatile and offers little room for complacency. Lastly, the steady rise in economic confidence was another positive signal.

“The Monetary Council will continue to make cautious, patient, and stability-oriented decisions,” noted Deputy Governor Barnabás Virág at a press briefing in Budapest. He emphasized that policymakers would carefully weigh holding or cutting the key rate by a quarter-point at each monthly meeting for the remainder of the year.

The NBH's policy pause in August occurred before the Fed and ECB's rate cuts, but Hungary should avoid overreacting to the Fed's more aggressive half-point reduction, Virág added.

As the next rate-setting meeting approaches on October 22, analysts are keeping a close eye on inflation trends, Hungary's risk perception, and financial market stability. In August, the country's headline inflation rate fell to 3.4%, the lowest in three and a half years and well within the central bank’s tolerance band around its 3% target. The NBH expects inflation to dip to 3.1% in September before rising to 4.2% by December, with disinflation resuming early next year.

"We see the year-end rate at 6.25%," analysts at ING Bank Budapest wrote in a report. "However, with the NBH meeting just two weeks before the U.S. election, there may be a minefield ahead in terms of investor sentiment and market stability. Plus, our short-term inflation forecast suggests a potential upside surprise compared to the central bank's projections."