After a pause in the easing cycle in August, the Hungarian National Bank (MNB) reduced the base rate by 25 basis points to 6.5% on September 24, in line with projections.

The Monetary Council also reduced the overnight deposit rate by the same clip to 5.5% and the overnight collateralised loan rate to 7.5%. The HUF/€ rate and bond yields were little changed after the decision, as MNB’s forward guidance suggests it will maintain a cautious and patient approach.

Policymakers cited several factors that justified the "cautious" easing, such as the looser monetary policy environment following the Fed’s and the ECB’s rate decision in September, continued disinflation and subdued external outlook. Furthermore, financial markets remained stable, and Hungary’s risk perception and consumer confidence has also improved, they added.

However, risks surrounding inflation and the volatility in investor sentiment warrant a careful and patient approach to monetary policy, according to the statement issued after the meeting.

At the online press conference, MNB deputy governor Barnabas Virag said the outlook on medium-term developments determining inflation is fundamentally unchanged, disinflation is expected to continue in the first quarter.

Inflation eased back to the tolerance band in August after peaking over the 4% band in the previous month, due to the decline in fuel price inflation, which was largely driven by base effects, and core inflation fell slightly to 4.6%.

The Monetary Council highlighted four alternative risk scenarios around the baseline projection in the September Inflation Report. These scenarios assume faster-than-expected interest rate cuts by major central banks, a prolonged weakness in European economic activity, a faster recovery in consumption driven by a more rapid unwinding of precautionary motives and slower growth in investment respectively.

A key question is whether the global interest rate cuts by major central banks will be accompanied by a recessionary environment, Virag said at the online press briefing. The MNB is closely monitoring pricing in the service sector and risk assessment, including the attainability of fiscal targets and changes in the external balance position, he added.

Virag stressed that ensuring financial market stability requires positive real interest rates. Globally the era of positive real interest rates has returned and everyone must adjust to this, he added. The MNB has shifted its guidance regarding global risk sentiment.

Volatile financial market developments, a renewed increase in geopolitical tensions and the risks to the outlook for inflation continue to warrant a careful and patient approach, he continued, confirming the MNB’s earlier guidance, that it will continuously evaluate incoming macroeconomic data, inflation prospects, and the evolving risk environment and make careful, data-driven decisions.

At the August meeting, Virag said market expectations that the base rate at the 2024 will be in the range of 6.25-6.50% seemed realistic. The MNB deputy did not touch on this issue, but according to ING Bank analysis, the fact that Monetary Council removed the line that there may be room for further cautious rate cuts in the period ahead, signals that the MNB "doesn't want the markets to see multiple rate cuts as a realistic scenario".

The HUF/€ rate remained stable after the rate decision, trading in a tight range of 394-395.