The Monetary Council of the Hungarian National Bank (MNB) left the base rate at 6.75% with a unanimous decision on August 27 in line with analysts’ projections after a 25pp cut in the previous month. The hawkish tone of the statement issued after the meeting helped the forint recoup losses earlier this week.

The MNB paused its 15-month easing cycle on Tuesday, which had brought the rates down from 18% in place from October 2022 until May 2023.

Policymakers cited volatility in financial markets, renewed geopolitical tensions and risks to the inflation outlook as consumer prices edged up over 4% in July, above the bank’s tolerance bank, while core inflation shot up from 4.1% to 4.7%, signalling underlying inflationary pressures.

In the statement, central bankers said the economic recovery has stalled in the second quarter due to a decline in the added value of the industrial sector, mainly because of subdued growth in Hungary’s main export markets in the EU.

Household consumption however will support GDP growth in the second half, spurred by strong real wage growth and the easing of precautionary motive of households, they added. Government officials, including Economy Minister Marton Nagy, have blamed this factor for the slower recovery of consumption and the strong saving rate of households, which has left a big hole in the budget and forced the government to revise its GDP forecast.

Rate-setters were of the view that the government’s revised 4.5% deficit target was attainable, as the budget posted a hefty surplus last month.

As in previous meetings, policymakers maintained a hawkish stance and stressed the need for cautious monetary policy in the future, adding that rate decisions will be data-driven, considering developments in the risk environment and inflationary outlooks.

Speaking in an online briefing, MNB Deputy Governor Barnabas Virag said inflation would dip below the tolerance band in the coming months and disinflation would continue in early 2025.  He blamed the July spike on the increase in food and fuel prices.

Mr Virag said inflation had "cast a long shadow" and pointed to the importance of anchoring inflation expectations to the target.

There is scope for further cautious easing in the coming period, according to Virag, who said the August inflation data will be of great importance in terms of evaluating the inflation outlook for the year. Other decisive factors to weigh at the next policy meeting include decisions by major central banks in September, the evolution of Hungary's risk assessment, and consumer and business confidence indices.

Fielding a question, Virag said one or two rate cuts for the remainder of the year remains a realistic scenario and it is more likely to be two than one, but the balance could be drawn next month.

Before the policy meeting, Hungarian analysts forecast the base rate would drop to 6.25%, with forecasts ranging from 5.75% to 6.5%, implying two 25bp cuts.

The MNB will also review its quarterly macroeconomic outlook at the September meeting.

In June, the MNB reduced its 2024 inflation forecast by 0.5pp to 3.0-4.5% from 3.5-5.0% in the March report and left the forecast unchanged at 2.5-3.5% for 2025 and 2026. The MNB kept its GDP guidance for 2024 unchanged at 2-3%. Growth is expected to reach 3.5-4.5% in 2025 and decelerate to 3-4% in 2026.

The forint gained slightly versus the euro after the rate decision.