An important day is coming for the forint: MNB interest rate cut expectations narrowed, yet the Hungarian currency fell

As shown on the basis of the expert survey published today by Portfolio: all the players we spoke to expect a 50 basis point interest rate cut, which would reduce the base rate to 7.75%. However, there is already a deviation regarding the further cutting path and thus the interest rate level at the end of the year.

We arrived at this unanimous expert survey by saying there was a marked adjustment in interest rate cut expectations that had been running until around February-March. As shown in the figure below: forward interest rate pricing starting in 6 months and starting in 9 months (6X9 and 9X12 FRAs) were still priced at a benchmark rate of around 5% towards the end of winter, but now they have risen considerably to around 6.5-7%; meanwhile, the forward interest rate agreements starting in one and three months (1X4 and 3X6) were more sideways around 7.5-8%.

Thus, the interest rate reduction priced into products with different durations was very narrowed, and finally the market has priced out a significant amount of priced cuts in recent weeks. With all of this, it is particularly interesting that the forint fell to around 395 against the euro, which shows that the market situation has changed substantially. This can mostly be attributed to the Fed’s interest rate cuts and the Israeli-Iranian conflict, but overall it indicates that

the room for maneuver of the MNB to cut interest rates has now narrowed considerably.

Moreover, investment expert Viktor Zsiday has already questioned: it is not even certain that the MNB still has significant room to cut interest rates. Since then, due to higher-than-expected US inflation and relatively strong labor market data the amount of interest rate cuts expected from the Fed this year has become much smaller. Based on current market prices, perhaps one or two 25-basis-point interest rate cuts can be made by the end of the year.

At home, meanwhile, it is falling within the inflation target range In relation to inflation, the actors expect another acceleration by the end of the year, and in addition to the exchange rate of the forint, this may also make the MNB cautious about the pace at which it can proceed with interest rate cuts.

The fact that, overall, there is no longer any serious room for downward movement in Hungarian interest rates is also well illustrated by our diagram below. Tomorrow we can be smarter about how the MNB sees the situation and the prospects.

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