Hungary’s central bank continued its monetary easing at a monthly policy meeting on July 25 and reduced the interest rate paid at one-day deposit tenders by 100bp to 15%. The decision was in line with analysts’ projections.

The Monetary Council also cut the central bank's O/N collateralised loan rate by 100bp to 17.50%, while leaving the O/N deposit rate, at the bottom of the "interest rate corridor", at 12.50%. The base rate, which is no longer the reference rate since mid-October, was left on hold at 13%.

Policymakers stressed that the favourable risk environment has enabled the Hungarian National Bank (MNB) to continue the normalisation of the interest rate environment at the previous pace, but stressed that tight monetary conditions are warranted in the current environment in order to achieve price stability, according to the statement after the meeting.

The MNB began its easing cycle in May when it reduced the O/N rate by 100bp to 17%, followed by a cut at the same clip in June as inflation began to ease.

To curb the slide of the forint, the central bank announced extraordinary measures in October 2022 and introduced a one-day deposit rate offering 18% interest at quick deposit tenders held daily, which has effectively replaced the main policy rate. This has created confusion among investors.

According to the base scenario of fund manager Amundi, the MNB will continue to proceed with 100bp cuts until September, when the base interest rate and the one-day deposit rate may converge after one year.

In the last three months of the year, analysts project the MNB to carry on with cautious 50bp cuts, bringing the main policy rate from 13% to 11.5% by the end of 2023.

At some point in the second half, real interest rates could return to positive territory, analysts said.

After the meeting, MNB deputy governor Barnabas Virag said the central bank would take a "gradual and predictable approach" to the development of the quick deposit rate.

Risk assessments remain favourable, but the external market environment is "still volatile", he added. He confirmed the central bank’s commitment to maintaining price stability by keeping monetary conditions tight.

Changing the base rate is not on the agenda until there is a sustained and significant decline in inflation, he said, adding that there is a chance that annualised inflation could fall to 7% by December.

Responding to questions, Virag basically ruled out rate cuts over 100bp even if the decline in inflation exceeds projections. In that case, "we may reach a positive real interest rate sooner," he added.

Output indicators and other high-frequency data suggested the economic downturn had continued in the second quarter, but pointed to a possible pickup in the third quarter. He noted the continuation of a "trend-like" improvement in Hungary's external balance and said the current-account balance could improve "faster than expected" and fall below 2% of the GDP from over 8% in 2022.

The volatility of the forint underlines the need for cautious and predictable steps in monetary policy, Virag pointed out.

The EUR/HUF moved in a tight range of 376.6-378.3 on Tuesday. At the end of last week, the currency pair moved from 373 to over 382 in two days.  Year-to-date, the forint gained 5.3% versus the euro and some 13% since its all-time low of 434 in mid-October.

Headline CPI could return below the 3% target in early 2025 and annual inflation may fluctuate between 16.5-18.5% in 2023, the MNB confirmed its earlier guidance on Tuesday.

The next revision in the macroeconomic outlook is due at the end of September.