The Magyar Nemzeti Bank actually said in March that it would like to implement interest rate cuts of 50 basis points from April, which means that the base interest rate of 8.25% can be reduced to 7.75% on Tuesday. So the picture is apparently simple, the central bank’s guidelines were perfectly accepted by the market, as expectations developed in a completely uniform manner.
In reality, however, the situation is much more exciting than that due to the bad US inflation data, the last two weeks have brought a lot of upheaval around the world. The Fed’s interest rate cuts were priced in, yields rose, and emerging market currencies, including the forint, weakened. Here too, it has emerged that the central bank may be forced to stop easing much earlier than it intended, if it keeps its goals of inflation and financial market stability in mind. It seems that the market trusts the designated monetary policy for the time being and does not think that the euro exchange rate returning to the 400 level would unsettle the MNB. The opinion is unanimous: the central bank, which has so far been cutting interest rates at a rate of 75-100 per month, will think it sufficient to switch back to the previously announced rate of 50, and the more hectic financial market movements of the past few days do not prompt it to be even more cautious.
The Monetary Council will most likely discuss the possibility of easing by 25 and 50 basis points on Tuesday, he says Tripp Mariann, senior analyst at CIB Bank. In our opinion, the outcome of the meeting is extremely uncertain, on Friday we see a slightly higher chance that the 50 basis point reduction will be in the majority, the expert adds. Trippon also highlighted that aIn his statement to Portfolio, the MNB’s chief economist made it clear that the stability of the financial markets, especially the exchange rate of the forint, plays a decisive role in interest rate decisions, so the fragile foreign exchange market situation can be a serious argument in favor of slowing down.
Zsolt Becsey, Unicredit’s economist approaches the question in the opposite way: “We believe that the Council will not risk the 75 basis point step in the current environment. The biggest obstacle to the MNB’s intentions to cut interest rates faster is the development of international yield levels. Following the American economic data, again the higher for longer (sustainably high interest rates) narrative in the markets has strengthened, which has pushed Hungarian long-term yields significantly higher, as well as the forint, as well as the BUX index in the first quarter, there is no indication that the 4.5 percent deficit path can be realistically achieved, even with the announced investment restraint measures foreign policy news, as well as the constant characteristic of the MNB government in previous months, also ceased. There is no problem, as the demand at the bond auctions was strong and our national bankruptcy risk premiums did not rise either, but the international situation definitely requires a more cautious approach from the central bank.”
Brown Szabo, an expert at the Equilibrium Institute, also believes that although the state of the real economy would allow for a larger interest rate cut, the central bank’s recent communication suggests that the preservation of exchange rate stability will prevail in Tuesday’s decision. Thus, he expects the MNB to reduce the key interest rate by only 50 basis points.
He is more cautious Peter Kiss, Amundi’s analyst: “A 50 basis point interest rate cut in April is almost certain, but the probability of further steps of a similar magnitude is beginning to rise, as developed market interest rate cut expectations have also come down and market volatility has increased. According to our base scenario, the rate will decrease further and reach 7 percent by June the base interest rate is decreasing, but the risks are increasing.Because of the data-driven mode, the central bank may even stop at a higher level in the event of a negative change in the external environment and domestic inflation causing negative surprises.
Kiss therefore expects 7% for the base interest rate expected in the middle of the year, while the majority expect a slightly lower 6.75%. This means that the market sees the 50-basis-point monthly rate cut rate as lasting until June. No one expects an acceleration, according to Barna Szabó, in the deteriorating external environment, the MNB’s scope for interest rate cuts is narrowing if it wants to keep the euro exchange rate below HUF 400. Monetary policy thus remains strict in a regional comparison, with high real interest rates and a strong real exchange rate.
While the central bank is expected to reduce the base rate unwaveringly until June, the second half of the year will bring changes. In addition to inflation, which is expected to stagnate and fluctuate above the central bank target, the central bank will make far fewer interest rate reduction decisions, according to the consensus, only one. Thus, the benchmark rate drops from 6.75% in the middle of the year to only 6.5% by December.
In the coming months, the annual rate of inflation will gradually rise again, and political frictions related to the EU, the weakening of the forint, geopolitical tensions and the volatility of international investor sentiment also justify a prudent monetary policy – explains Márta Balog-Béki, who is close to the market consensus , MBH Bank’s senior capital market analyst.
Péter Virovácz, the economist of ING Bank believes that the central bank will not relax at all in the second half of the year. “The period of sustained maintenance may come. Our inflation forecast for December is still between 5.5-6.0 percent. In the second half of the year, a stable interest rate of 6.75 percent would continue to ensure the positive real interest rate environment and the demand for forint assets in the by maintaining an appropriate risk premium.”
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