The Monetary Council of the National Bank (MNB) reduced the base rate by 50bp to 7.75% in line with projections, slowing down the pace of monetary easing from 75bp in the previous meeting. The rate decision was in line with analysts’ projections, as MNB policymakers flagged the launch of a new phase in monetary policy with smaller rate cuts. 

There was no other option discussed and voting was unanimous, MNB deputy governor Barnabas Virag commented after the meeting, setting a hawkish tone, according to comments.  

Policymakers said domestic disinflation was strong and broad-based, however the volatile risk environment and increasing risk aversion continue to warrant a careful and patient approach to monetary policy.

The rate trajectory of major global central banks has shifted higher since the start of the year, in parallel with rising long-term yields in developed markets, leading to the narrowing of risk premiums. As a result, risk aversion towards emerging market currencies has intensified, the MNB said.  The prospects of higher interest rates in the US has reduced the attractiveness of the currency on the one hand, while the high-interest premium has stabilised the forint, currency traders said.

The central bank expects inflation to increase temporarily in the middle of the year due to the retrospective pricing of market services, and base effects. Core inflation is expected to fluctuate between 4.5% and 5% in H2.

Virag said that a tight monetary policy is needed to achieve MNB's inflation target by 2025, adding that if services inflation remains high, a general trend in the global economy, then the target can only be reached with lower imported inflation.

MNB put average inflation for 2024 between 3.5% and 5%, which is set to fall to 2.5-3.5% in 2025, below its 3% target.

The market expects the base rate to fall to 6.75% by June, which could be achieved with two 50 basis point rate cuts, but there is no need to rush, he added.

In the new phase of monetary policy, the MNB will make decisions on any further reductions in a data-driven manner, according to the statement.

Commenting on that, Virag said that after June, the money market environment and incoming date will determine MNB’s policy actions, but as inflation is set to rise temporarily in the middle of the year, there might be limited room for further easing.

MBH Bank analysts see the 6.75% target set by MNB achievable by June, but after that, policymakers will likely opt for a stop. The bank projects the base rate to fall to 6.25% by the end of the year.

The forint traded in a tight range during the day against the euro and was a tad stronger following the meeting at 393.