Hungary Stock Market (ann. var. of BUX Index %)

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MNB narrows interest rate corridor again in May

At its 23 May meeting, the Monetary Council of the Hungarian National Bank (MNB) left its base rate unchanged at 13.00% for the eighth consecutive meeting. However, the Bank cut the overnight collateralized lending rate to 19.50% from 20.50%, while it left the overnight deposit rate unchanged at 12.50%, thereby narrowing the interest rate corridor for the second consecutive meeting.

The decision to narrow the interest rate corridor was again driven by a persistent reduction in economic risks. On top of this, the Bank also announced that it would continue to strengthen 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 cooling activity and a favorable base effect, should bring inflation within the Bank’s target range of 3.0% plus or minus one percentage point in 2024. The headline inflation rate decelerated to 24.0% in April from 25.2% in March, and the Bank expects it to average 15.0–19.5% this year, 3.0–5.0% 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, loosening the stance is not currently on the table; 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 release, economists at ING, stated:

“According to our expectations, the Central Bank—if everything goes according to plan—will merge the base rate and the effective rate at 13% at its September rate-setting meeting. This would mean a series of ‘copy-paste’ decisions based on the May moves. In accordance with this merging, the interest rate corridor with a width of 300 basis points that existed before mid-October will also be restored. This would translate into an interest rate corridor with the repo rate at 15.5% and the depo rate at 12.5%.”

The next monetary policy meeting is scheduled for 20 June.