Hungary Likely to Cut Rates as Forint Gains and Inflation Slows

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(Bloomberg) — Hungary’s central bank is likely to lower borrowing costs for the first time in months as slowing inflation and a stronger currency give policymakers room to diverge from global peers starting monetary tightening.

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The National Bank of Hungary will cut its benchmark interest rate by a quarter point to 6% on Tuesday, according to 20 out of 21 economists surveyed by Bloomberg. One analyst expects a half-point reduction. The decision is scheduled for 2 p.m. in Budapest, followed by a briefing, fresh inflation projections and statement an hour later.

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The case for easing one of the European Union’s highest rates has strengthened significantly since the last meeting, when only a single member of the Monetary Council supported a cut. While Governor Mihaly Varga has stuck to a cautious tone citing global uncertainties, he has signaled that there may be more room for maneuver after the publication of the inflation projections due today. 

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The potential cut in Hungary contrasts with the European Central Bank and peers like the Czech Republic, which raised interest rates for the first time in four years last week. Hungary’s last move was a cut in February, before the spike in energy costs from the Iran war boosted price risks.

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Hungary’s expected rate reduction “will be the key event this week in the region,” analysts at Erste Group Bank AG wrote in a note. “Low inflation, a strong forint and prospects for a resolution of the Middle East conflict, reducing the risks of inflationary pressure in the future, support such a move.”

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Hungary’s inflation has already surprised on the downside with consumer-price growth slowing to 1.8% in May, below the central bank’s 2%-4% tolerance band. While temporary government measures continue to suppress some prices, economists increasingly expect inflation to remain contained even after those measures are phased out.

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The forint has strengthened sharply since Prime Minister Peter Magyar’s election victory in April, with Hungarian government bond yields falling on his plans to adopt the euro. 

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The strength of the Hungarian currency — up 9% against the euro this year — is helping to limit imported inflation and provides policymakers with greater confidence to begin the lowering of borrowing costs. Money market traders are pricing in more rate cuts for the rest of the year, based on forward rate agreements.

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