Strong disinflation and the stability of financial markets allow the National Bank to continue monetary easing, but external risks continue to warrant a cautious approach, MNB deputy governor Barnabas Virag said after the central bank cut the base rate by 75bp to 11.50% on November 21. Policymakers voted unanimously after weighing two other options, a 50bp and 100bp rate cut.

The Monetary Council lowered the symmetric interest rate corridor in tandem, bringing the O/N deposit rate to 10.50% and the O/N collateralised loan rate to 12.50%

The decision was hardly surprising after Mr Virag flagged a 75bp easing at a conference last week and said the base rate could dip below 11% by the end of the year. If headline inflation drops to around 7% as projected by analysts and policymakers, this would imply a hefty real interest in Hungarian assets. The MNB deputy noted that the base rate would fall to single digits in February, for the first time since June 2022.

The MNB has cut borrowing costs from its peak of 18% by 650bp in the last seven months, but it still remains the highest in the EU.

Mr Virag said the central bank sticks to a data-driven and cautious approach, considering global shocks and risks, and monitors the developments in inflation and the risk environment.

He stressed that the "MNB can’t declare victory over inflation yet", adding that disinflation must continue in 2024. The central bank's hawkish stance has stabilised the currency, which is trading in range bound against the euro between 376-386 in the last month. Falling inflation has led to lower yields and massive demand on the local bond market. The €/HUF was little changed at 380 after the decision.

He said risk appetite had improved since the last monthly policy meeting, but added that global uncertainty was increasing in parallel with rising geopolitical tensions and international risks, warranting a "cautious approach".

Annualised inflation fell just below 10% last month for the first time in 19 months and core inflation dropped to 10.9%, both in the lower half of the forecast range. Recent monthly repricing reflected in both data was below the historical average for October. The three-month annualised change in core inflation, an indicator better capturing underlying inflation in the current situation, fell below 3%, it added.

By the end of the year, Hungarian inflation will no longer be the highest in the European Union, Mr Virag said, recalling the MNB forecast, confirmed on Tuesday, that the annualised CPI is set to fall to 7% in December.

He acknowledged a further rise in real interest rates as disinflation accelerates and said positive real interest rates supported the further decline in inflation.

Headline inflation could average 18% for the year, decelerate to 4.0–6.0% in 2024, and sit between 2.5-3.5% in 2025. This means that MNB could meet its inflation target of 3% only in 2025.

In its latest fall report, the European Commission forecast higher rates for 2025, at 4.1%, which suggests that MNB’s target will only be reached in 2026.

Hungary’s economy emerged from a technical recession in Q3 with a 0.9% growth quarter on quarter and its high-frequency data, economic performance is expected to further improve by the end of the year.

Agricultural output and net exports are expected to make a positive contribution in 2023 while declining inflation and the recovery in domestic demand will support growth in the next two years.

The MNB said this year’s GDP will come to the lower end of its -0.5-0.5% range in the September Inflation Report and growth should accelerate to 3.0-4.0% in 2024 and 2025 respectively.

Hungary’s external position has improved with the retreat of energy prices, lower import intensity demand and growing vehicle and battery industry exports. The MNB projects current account deficit is expected to fall below 1% of GDP in 2023, a radical improvement from -8.2% a year earlier.