Hungary to Hold Rates as Price Curbs Fall Short: Decision Guide

f{x2nud(d0mdr45be(lft9t9_media_dl_1.png Hungarian statistics office

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(Bloomberg) — Hungary’s central bank is likely to keep its key interest rate unchanged for a ninth month, holding steady amid mounting geopolitical risks and persistently high inflation expectations. 

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The National Bank of Hungary will keep its benchmark rate at 6.5% on Tuesday, according to all 20 economists in a Bloomberg survey. That’s tied with Romania for the highest key rate level in the EU.

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The central bank will also publish new inflation forecasts, which are unlikely to be heavily influenced by Prime Minister Viktor Orban’s price interventions this year. 

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The government has imposed temporary profit curbs on products ranging from food staples to drugs — and convinced service providers from banking to telecommunication to skip price hikes. Those moves have targeted components that make up the consumer price index, an effort that would hold headline inflation in check. 

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Peter Virovacz, an economist at ING Bank in Budapest, said the interventions — taking place as Orban struggles in the polls less than a year before parliamentary elections — are “noise” for monetary policymakers — “one-offs with no lasting effect.” 

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“Policymakers won’t budge on rates — but if they were to cut, the market reaction would be negative,” Virovacz said. 

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Money-market traders are pricing in less than a quarter-point cut in interest rates this year, according to forward rate agreements.

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With headline inflation rising to 4.4% in May — outside of policymakers’ 1 percentage point tolerance band around their 3% target — rate-setters are likely to stay cautious. 

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Governor Mihaly Varga, Orban’s longtime finance minister who took over the central bank’s helm in March, last month said that policymakers won’t even consider monetary easing for now, given the inflation outlook. 

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The hawkish rhetoric has helped reduce the volatility of the forint, maintaining it in a tight range just above the 400-per-euro level. 

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The median household’s inflation expectation in a year’s time is 9% — more the double the headline data — according to the central bank’s own estimate. 

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Additional inflation pressures now may be generated by Israel’s war on Iran, Economy Minister Marton Nagy said Monday in a statement after the US bombing of Iran’s nuclear sites over the weekend. He said higher transit costs and energy supply constraints may push inflation higher.

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