Hungary’s Central Bank to Hold Rates Despite Post-Election Rally

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(Bloomberg) — Hungary’s central bank will probably keep interest rates unchanged after a post-election market rally, as policymakers await government plans on tackling a bloated budget and on gaining access to frozen European Union funds. 

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The National Bank of Hungary is expected to keep its benchmark rate at 6.25% on Tuesday, the highest level in the EU after Romania, according to all 23 economists in a Bloomberg survey. 

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The central bank will publish a statement at 3 p.m. in Budapest, with Governor Mihaly Varga delivering remarks at a briefing beginning at the same time.

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It’s the first decision since Prime Minister Viktor Orban was ousted in a landslide election on April 12. His defeat after 16 years in power triggered the forint’s strengthening against the euro and sent yields on local debt tumbling. 

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Yet the central bank is expected to proceed cautiously even with inflation below the target. Incoming premier Peter Magyar, a former ruling party insider turned critic, faces a difficult task of curbing the budget deficit. He also has to convince the EU to release frozen funds that are essential for his administration to boost the economy.

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“The central bank will likely feel it prudent not to react to the election results with an immediate interest rate cut,” CIB Bank Hungary economist Mariann Trippon said in a note to clients. She sees room only for limited monetary easing this year, forecasting a year-end interest rate of 5.75% or 6%.

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Bets on Hungary regaining access to more than $20 billion in withheld EU funds and the new government’s plans to push for euro adoption have spurred a market rally. The forint rose 5.7% year-to-date against the euro while 10-year government bond yields fell 76 basis points in the period. 

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Magyar is scheduled to meet with European Commission President Ursula von der Leyen in Brussels on Wednesday to discuss EU fund access.

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Governor Varga, formerly Orban’s longtime finance minister, said last month that “all options are on the table” for future interest rate decisions, citing rising inflation risks due to the fallout from the Iran war. Days before the outbreak of hostilities in late February, the central bank cut the key rate by a quarter-point in the first reduction in almost a year-and-a-half.

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Market bets for potential rate hikes due to the effects of surging global energy prices reversed following Orban’s election defeat. The optimism was also spurred by the incoming Magyar administration’s plans to put Hungary on the path to euro adoption, which would entail keeping tabs on fiscal spending and anchoring inflation. Orban had consistently rejected the euro.

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Still, the eventual phasing out of government price interventions — from fuel to basic food staples — continues to pose inflation risk. The central bank last month raised its projection for average inflation this year to 3.8% from 3.2%, citing rising energy prices. It targets 3% inflation and has a 1 percentage-point tolerance band around its goal.

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