Hungary: Central Bank leaves rates unchanged in January
Hungary’s rates hit a European high: At its meeting on 28 January, the Central Bank decided to leave its base rate at 6.50%, in line with market expectations. As a result, Hungary’s interest rates became the joint-highest in the EU, alongside those of Romania.
Above-target inflation drives hike: Intensifying price pressures chiefly drove the decision; inflation breached the Bank’s 2.0–4.0% target band in December, reaching 4.6% and exceeding analysts’ expectations. Additionally, the Bank noted that inflation is set to increase further in January, and the risk of it rising further has recently grown. Against this backdrop, inflation could return within the target band later than the Bank envisaged in December. Recent weakness in the forint has also fueled price pressures and likely further warranted the Bank’s hold.
Bank to resume cuts in Q2: In a subsequent briefing, officials noted that interest rate cuts in the next months were unlikely; recent pressure from the government to cut rates amid an economic recession is unlikely to sway the incoming Governor Mihaly Varga, who stated at his confirmation hearing in December that his focus will be returning inflation to the 3.0% target. The majority of our panelists expect the Bank to resume its rate cuts in Q2 and our Consensus is for about 100 basis points in total rate reductions by the end of 2025. Unexpected forint weakness and a potential phase-out of utility subsidies pose upside risks to inflation and, therefore, the policy rate.
The Bank will reconvene on 25 February.
Panelist insight: ING analysts said:
“We think a total of 75bp of rate cuts this year is realistic in Hungary, which would be roughly in line with the average size of expected easing cycles (between 75bp and 100bp) in the region. However, if price pressures surprise to the upside and inflation expectations become less anchored, 2025 could also pass without a single rate cut.”