Hungary to Hold Rates as Iran Turmoil Upends Monetary Outlook

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(Bloomberg) — Hungary’s central bank is expected to hold its key interest rate at the last policy meeting before elections in April as the turmoil in financial markets has left the country’s assets among the most exposed globally.

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The National Bank of Hungary will keep the benchmark interest rate unchanged at 6.25% on Tuesday, according to all 24 analysts in a Bloomberg survey. The central bank will also publish its inflation projections, which may signal how much the war in Iran has already changed the outlook for price growth. 

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Policymakers delivered a rate cut last month after holding conditions steady for almost one and a half years. Yet even with inflation falling below the central bank’s target band in February, the upheaval on global energy markets due to the war in Iran has shifted expectations regarding further rate moves — with money markets pricing in monetary tightening in the coming months.

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Tuesday will mark the last rate-setting meeting before a pivotal election on April 12, where Prime Minister Viktor Orban is trailing the opposition in most polls. Traders are pricing in potential hikes as landlocked Hungary is dealing with an outage in oil flows from Russia at the moment the crisis in the Middle East hits global supplies. 

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“Money market pricing has become volatile, but it does not indicate a straight rate hike on Tuesday,” said Peter Virovacz, an economist at ING Bank’s Hungarian unit. “However, it does show expectations of monetary tightening in the near-term.” 

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Since the Iran war started the forint has been one of the worst-performing currencies against the euro among expanded majors tracked by Bloomberg. It has depreciated more than 3%, although comments from President Donald Trump on a potential resolution to the war again helped the forint recoup some of its losses during the session on Monday.

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“An interest rate hike could only be considered if extreme market tensions were to arise that threaten financial stability and cannot be addressed by other means,” Mariann Trippon, an analyst at Intesa Sanpaolo’s Hungarian CIB Bank unit, wrote in a note.

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Earlier this month, Hungary’s central bank offered to use its foreign-currency reserves to provide liquidity for energy imports and vowed to keep monetary policy cautious to maintain the stability of the forint.

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“The NBH will rely first on a far more hawkish message that could be accompanied by a verbal intervention that it could step in and defend the forint, if its depreciation is seen as excessive,” said Piotr Matys, an analyst at InTouch Capital Markets.

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