Hungary's central bank (MNB) kept the base rate unchanged at 6.5% for the fourth straight month, in line with consensus. The interest rate corridor remained unchanged at 5.50% (deposit) and 7.50% (collateralised loan). The decision to keep rates on hold was unanimous and the option for a rate cut had been taken off the agenda, deputy governor Barnabas Virag said.

The change in forward guidance suggests persistent tight monetary policy ahead, as policymakers highlighted upside risks to meeting the 2025 inflation forecast.

At the last meeting, policymakers said geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warranted a "further pause in cutting rates", which was changed to the line "maintaining tight monetary conditions" in Tuesday’s (28 January) latest statement.

Virag said consumer prices and core inflation had risen faster than expected in December, up to 4.6% and 4.7% year on year respectively, their highest levels for 2024.

The MNB anticipates inflation to rise further in January before disinflation could resume in the following month, thanks to base effects and supported by more moderate repricing in market services, which could be offset by higher excise taxes and the exchange rate changes. Policymakers added that the weaker forint has fed into inflation through the rise in imported goods, while the development of service inflation, well over the average, will remain under scrutiny.

Virag also warned that the risk of missing inflation trajectory compared to December forecast are growing, and bringing headline CPI within the 3% tolerance band could come later than projected.

In the last quarterly update, the MNB raised its 2025 inflation target from 2.7-3.6% in September to 3.3-4.1%.

Policymakers also stressed the importance of anchoring inflation expectations of households and companies, which have been on the rise, preserving financial market stability, supported disciplined monetary policy.

Given the risk aversion towards emerging markets and the current outlook for inflation risks, the base rate may remain at the current level for an extended period, Virag told reporters. He also noted that restrictive monetary policy is ensured by positive real interest, essential for keeping Hungary's forint stable.

The hawkish tone of the central bank had little impact on Hungarian currency as HUF/€ traded near the 408 level, seen as a critical support technically. The currency pair peaked at 416 earlier this year.

MBH in a note said that its 3.8% inflation forecast for 2025 could be missed, potentially exceeding the MNB's upper target range of 4%. The bank's forecast of the base rate dropping to 5.75% at the end of the year is accompanied by upward risks. Analysts said there is room for further easing if the Fed lowers the federal funds rate below 4% by the end of the year and if global risk appetite improve.

The current mandate of the central bank is set to expire in March, making the February rate decision the final one under Gyorgy Matolcsy's leadership before Finance Minister Mihaly Varga assumes the role. The incoming leadership will face the delicate task of balancing financial stability with the government’s push to ease lending conditions and stimulate the economy ahead of a pivotal election year.

During his December committee hearing, Vargas sought to ease concerns by reaffirming that the MNB’s primary objective would remain the achievement and maintenance of price stability. He also stressed his commitment to meeting the central bank’s 3% inflation target as its incoming governor.