Hungary Set for Another Rate Cut as Inflation Stays Muted

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(Bloomberg) — Hungary’s central bank is poised to lower borrowing costs for a second straight month as subdued inflation allows policymakers to press ahead with their monetary easing cycle.

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The National Bank of Hungary will cut its benchmark interest rate by a quarter point to 5.75% on Tuesday, according to all 23 economists surveyed by Bloomberg. The decision is due at 2 p.m. in Budapest, followed by a statement and Governor Mihaly Varga’s press briefing an hour later.

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The move would follow June’s quarter-point reduction, when the central bank restarted easing after sharply lowering its inflation forecasts due to the forint’s appreciation. Varga said policymakers had room for two additional quarter-point cuts over the summer before reassessing conditions in September, when a new set of macroeconomic projections will be published.

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Incoming data reinforced that guidance, with annual inflation slowing to 1.7% in June from 1.8% a month earlier — below the central bank’s 2%-4% tolerance band for a second consecutive month. 

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The forint’s appreciation after Prime Minister Peter Magyar’s election win over Viktor Orban in April, softer energy prices and subdued imported inflation continued to offset the gradual removal of government price-curbing measures. The new government’s pledge to pursue euro adoption has also supported the currency and helped compress government bond yields.

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Since last month’s rate decision, the forint has weakened nearly 2% against the euro amid escalation in the Iran war. That’s made the currency among the worst-performing globally and underscored landlocked Hungary’s heightened exposure to energy price swings.

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The depreciation is likely to bolster the cautious attitude of the central bank’s Monetary Council, which last month eschewed a proposal for a half-point key rate cut in favor of proceeding in quarter-point steps.

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Even after another 25-basis point reduction, Hungary would still have one of the highest benchmark interest rates in the European Union, leaving policymakers with scope to continue normalizing policy while maintaining a rate premium over peers including Poland and the Czech Republic.

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