In a move mirroring April's decision, the National Bank of Hungary once again trimmed key interest rates by 50 basis points this week. However, the monetary policy outlook beyond June remains clouded in uncertainty, with the central bank's cautious and patient approach suggesting a narrowing margin for further easing maneuvers. One more rate cut is anticipated in June before policymakers potentially hit the pause button in this year-long easing cycle.
The benchmark rate now stands at 7.25% following Tuesday's 50 basis point reduction, aligning with estimates from 24 of the 25 economists surveyed by Bloomberg. Despite the latest trim, the central bank avowed its commitment to a "careful" and "cautious" monetary policy stance, per an official statement.
Deputy Governor Barnabás Virág shed light on policymakers' perspectives during an online briefing, revealing expectations for another quarter or half percentage point rate cut in June. However, he cautioned that further easing beyond that point would have "very, very limited" room to unfold, stopping short of definitively declaring June as the easing cycle's culmination.
Hungary embarked on this rate-cutting journey a year ago after rates peaked at 18%, gradually decelerating the pace of easing over time. As Virág explained, the central bank is closely monitoring resurgent inflation, particularly within the service sector, as well as volatility in global investor sentiment – factors that could constrain further aggressive easing measures.
Aiming to fortify the forint by offering investors inflation-beating interest rates, the central bank's capacity for deeper benchmark cuts has been curbed. April saw the inflation rate climb to 3.7% year-on-year, marking the first acceleration in over a year. Virág noted that disinflation isn't anticipated to resume until early next year.
Very, very limited
"We prefer to err on the side of caution with a 25 basis point rate cut in June. However, we now give roughly equal odds to a 50 basis point easing in June," analysts at ING Bank in Budapest commented, adding that Virág's implicit guidance suggests "the further scope for rate cuts is very, very limited as far as we know at the moment." Consequently, ING predicts the National Bank of Hungary may adopt an even more hawkish stance, potentially keeping rates on hold through the second half of the year.
The central bank's cautious rate approach has buttressed the forint throughout May, with the currency remaining essentially stable and even gaining ground against the euro amidst favorable global conditions and the bank's hawkish tone. However, medium-term prospects appear murkier, with an unclear economic recovery, waning external balance outlook, fiscal risks, and the potential for a sovereign rating downgrade collectively posing risks of reigniting a "risk-off" sentiment toward the forint.
Ultimately, June's inflation report coupled with the forint's performance will be pivotal in shaping the rate outlook for the latter half of 2024. For now, the National Bank of Hungary continues to deftly navigate a narrowing path forward, weighing economic pressures against safeguarding currency stability through judicious monetary maneuvering.
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