Hungary holds rates after June ‘turning point’

The Central Bank of Hungary (MNB) paused its easing campaign on August 27 after 10 consecutive interest rate cuts.

It left the corridor unchanged, with the key policy rate staying at 6.75%, after inflation rose to 4.1% in July. Its target rate of inflation is 3% in annual terms with a 1% tolerance band.

The MNB said in June that it had passed a “turning point” in its monetary policy, and that any future decisions would either be to hold rates or cut them by only 25 basis points.

The monetary council made its unanimous decision a week after finance minister Márton Nagy said the central bank should “open the money taps” in an interview with pro-government publication Index.

“They [the central bank] are in cyclops mode,” he said. “The central bank is only concerned with inflation.”

Nagy added that with the figure “hovering around 4%” it was already possible to “restart growth” and “lower inflation expectations and fears”.

He also criticised the increased capital requirements to which banks have been subject since the start of the year, which he said “tend to curb lending”.

However, the MNB’s survey of banks, released two days after the interview, indicated that lender sentiment was consistent in the first half of 2024, despite the increase in capital requirements.

Although the bank did not pivot in the way Nagy would have preferred it to, it agreed with his assessment of the economy, saying that its recovery had stalled in Q2.

“Compared to Q1, domestic economic performance fell by 0.2%, while GDP rose by 1.5% in annual terms,” the bank said on August 27. Construction and real estate transactions were the strongest contributors to annual growth, while “economic expansion was restrained by a decline in value added by industry”.

The MNB added that retail trade continued to grow in annual terms. Unemployment stood at 4.2% in July and although real wages continued to rise, consumer confidence remained stagnant in the first half of the year.

The bank said the rise in core inflation to 4.7% year on year in July reflected higher fuel and food prices. It said the monetary council was paying “special attention to pricing decisions in the market services sector” where disinflation continued to be slow.

The MNB is expecting inflation to fluctuate closer to the upper band in the coming months. It forecast that core inflation would rise to nearly 5% by the end of 2024 before falling.

Barnabás Virág, the bank’s vice-governor, said market expectations of two more 25bp cuts before the end of the year was still an “absolutely realistic” scenario. He said the MNB would make future decisions based on four factors: inflation figures, decisions by major central banks, consumer and business confidence, and risk assessments.

Virág hinted at the possibility of a September rate cut. He said that by then, more major central banks, including the US Federal Reserve, would have announced policy decisions, and that these influenced money flows in smaller economies, such as Hungary’s.