Hungary: MNB narrows interest rate corridor again in June
At its 20 June meeting, the Monetary Council of the Hungarian National Bank (MNB) left its base rate unchanged at 13.00% for the ninth consecutive meeting. However, the Bank cut the overnight collateralized lending rate to 18.50% from 19.50%, while it left the overnight deposit rate unchanged at 12.50%, thereby narrowing the interest rate corridor for the third consecutive meeting.
The decision to narrow the interest rate corridor was driven by a “favorable risk environment”. On top of this, the Bank also stated that it would continue to reinforce monetary policy transmission by absorbing interbank forint liquidity, thus reducing liquidity in the economy.
The Bank reiterated that it would keep the base rate at its current level for a protracted period, as it expects previous hikes to have a disinflationary effect. This, together with subdued activity and a favorable base effect, should bring inflation down to single digits by the end of this year and within the Bank’s target range of 3.0% plus or minus one percentage point in early 2025. The headline inflation rate decelerated to 21.5% in May from 24.0% in April, and the Bank expects it to average 16.5–18.5% this year, 3.5–5.5% in 2024 and 2.5–3.5% in 2025.
Looking ahead, the Bank sees the current rate as adequate to manage inflation risks. The MNB expects inflation to slow at an accelerating pace in the coming months. That said, the Bank reiterated that it would keep monetary conditions tight until “inflation expectations are anchored and the inflation target is achieved in a sustainable manner”.
Commenting on the outlook, economists at ING stated:
“If the supportive environment remains and market stability is maintained, the NBH is going to continue its series of gradual interest rate cuts of 100 bps. Accordingly, the base rate and the effective rate should merge at 13% at the September rate decision, in our base case. As to whether the rate cuts will resume immediately from here or whether there will be a pause, we will only be able to say with a high degree of certainty once we have seen market conditions and the inflation situation in the autumn.”
The next monetary policy meeting is scheduled for 25 July.