As EU inflation declines, Hungary's central bank lowers rates for the eighth time.
In light of global trends, Hungary's recent rate cut may help the forint if rates continue to rise above 9% through Q1 2024, defying government pressure.
Hungary's central bank has reduced its base rate by 75 basis points to 10.75 per cent, marking the eighth consecutive rate cut. This move, in line with expectations, comes as the European Union's highest inflation rate dips into single-digit territory. Central banks in Eastern Europe, particularly Poland and Hungary, have been aggressively cutting borrowing costs, with the Czech National Bank likely to follow suit with its first rate cut in over three years.
At 1400 GMT, the central bank is scheduled to release a policy statement along with an update on its quarterly economic forecast. In an effort to boost the economy, the government has pushed for deeper cuts, but the central bank has remained cautious. The administration of Prime Minister Viktor Orban has called for more aggressive rate cuts to stimulate the economy, which analysts project will shrink by 0.6% in 2023 before growing by 2.8% in 2024—below Orban's initial projections.
Mihaly Varga, the finance minister, emphasized the state of the economy, which could jeopardize the prospects for the upcoming year, particularly since Orban has local government and European elections coming up. the central bank remains cautious, emphasising the need for disinflation in the coming year, with economists projecting another year of above-target price growth.
Despite lower-than-expected inflation and pressure from the government for more substantial rate cuts, Hungary's central bank has recently lowered interest rates, reflecting its cautious approach. Tatha Ghose, an economist at Commerzbank, emphasized the notable dovish tendencies that have emerged in international markets and are impacting the language used by major central banks. By keeping interest rates above 9% through the first quarter of 2024, real interest rates could be moderately positive, which would help the forint.
The forint has appreciated by about 4% this year after falling to a record low versus the euro in October as a result of skyrocketing inflation. But like other Central European currencies, it has somewhat declined since the rate cut last month.
