After a 25bp cut in September, policymakers of the Hungarian National Bank (MNB) left the base unchanged at 6.50% at a monthly policy meeting on October 22, and kept the interest rate corridor between 5.5-7.5%, in line with projections. Most analysts see Hungary’s base rate falling to 6.25% by the end of 2024.

The decision came as little surprise after MNB deputy governor Barnabas Virag signalled at a conference last week that the current rate might remain in place for a longer period.

With the hawkish forward guidance, the HUF/€ moved lower after the meeting and traded in a tight range around the 400 level.

In a statement released after the meeting, the Monetary Council said the domestic inflation outlook was consistent with the projection in the central bank's latest quarterly Inflation Report published in September. Central bankers pointed to an increase in upside risks to inflation on the back of deteriorating international investor sentiment and volatile commodity prices.

Hungary’s inflation fell to the 3% target of MNB last month, a 44- month low, but it is expected to accelerate in the remaining part of the year due to base effects.

Since the last rate-setting meeting, some of the factors watched closely by the MNB changed, which warranted the pause in interest rate cuts. Policymakers named the "re-intensifying geopolitical tensions, volatile financial markets and the risks to the outlook for inflation" for taking a pause in the easing cycle.

"The external interest rate environment may ease more slowly than previously expected, while the expected interest rate paths of the world's leading central banks are still surrounded by uncertainty," they added.

Policymakers said the MNB was ready to "smooth" movements in financial markets at the end of the year with swap tenders, discount bond auctions and longer term instruments to ensure the effectiveness of monetary policy transmission. The MNB has used one-day FX swap tenders and weekly discount bill auctions to this effect.

At a press conference, MNB deputy governor Csaba Kandracs said the central bank's approach has not changed as it continues to operate in a data-driven manner and will closely monitor the factors that influence monetary policy, including the country’s risk assessment and financial market stability.

"We are not afraid to maintain the current interest rate levels for an extended period if necessary," he added. 

Policymakers also said keeping the rates at current level could cause an increase in the relative interest spread, which according to analysts could shore up support for the Hungarian currency.

According to Kandracs, there is no need to revise the economic forecasts for Hungary, as the sustainable inflation target remains achievable by 2025 despite worsening conditions.