The Hungarian National Bank (MNB) reduced the base rate by 25bp to 6.75% on July 23 in line with market expectations and aligning with the previous rate decision. The central bank is likely to carry out 1-2 more rate cuts this year, bringing the rate to 6.25-6.50%, which would still be the highest among its CEE peers.

The O/N deposit rate was cut to 5.75% and the O/N collateralised loan rate to 7.75%.

Policymakers cited the improving global risk appetite for the monetary easing. They said this was due to the recent fiscal adjustment of the government, set to reach 0.6% of GDP in 2024 and 0.7% in 2025.

Furthermore, the record high level of Fx exchange reserves and current account surplus and the MNB’s cautious monetary policy have helped improve risk assessment, leading to the stability of the currency and lower risk premium.

Analysts also noted that shifting market expectations for future rate decisions by major central banks have also widened the room for manoeuvre for further monetary easing.

The likelihood of the Federal Reserve starting its own rate-cutting cycle in September has increased significantly, with the market pricing in 2-3 rate cuts of 25bp.

Despite these positive trends, the Monetary Council stressed that a cautious and patient approach is justified due to geopolitical tensions, a volatile financial market environment, as well risks surrounding global and domestic disinflation.

The central bank will continually evaluate incoming macroeconomic data, inflation outlooks, and the risk environment to make data-driven decisions, it added.
Policymakers noted that the inflation outlook continued to be consistent with its latest projections published in June and the CPI will remain lower than the market expectations despite the repricing, especially in market services, will be higher than the historical average.

The headline data is seen to remain near the upper edge of MNB's tolerance range in the coming months, with core inflation potentially rising to around 5.0% by year-end. Annual average inflation could be between 3.0% and 4.5% in 2024.

On macro outlooks, policymakers said the deficit reduction measures will support meeting the 4.5% deficit target this year and 3.7% in 2025, helped by the significant decrease in interest expenditures. The primary government balance is expected to reach near equilibrium levels in 2024.

The current account surplus is set to reach 1.5-2.7% of GDP in 2024, before rising to 3-4% in 2025 and 2026.

At the online press briefing, MNB deputy governor Barnabas Virag said keeping the base rate on hold and a 25bp rate cut were the two options on the table.

Tight monetary policy remained "key" to maintaining financial market stability and achieving the inflation target sustainably. Virag said that analysts’ expectations of 1-2 more rate cuts in the second half are realistic.

He added that changes to the country's risk assessment would "greatly" influence the room for manoeuvre of domestic monetary policy in the second half of the year.

The forint was little changed after the rate decision.