Hungary Holds Base Rate Steady At 13%, Slashes Lending Rate By 450 Bps

(RTTNews) - The Hungarian central bank left its key interest rate unchanged on Tuesday, but slashed the overnight lending rate, which was raised significantly in October last year amid the financial market turbulence, as policymakers assessed that the inflation risks are manageable and the financial market concerns have subsided.

The Monetary Council of the Magyar Nemzeti Bank, led by Governor Gyorgy Matolcsy, left the base rate unchanged at 13.00 percent, in line with economists' expectations. The overnight deposit rate was held at 12.50 percent.

The overnight collateralized lending rate, which is the upper end of the interest rate corridor, was sharply cut by 450 basis points to 20.50 percent.

"The current level of the base rate is adequate to manage fundamental inflation risks," the MNB reiterated its statement from the previous sessions. The bank said the risk environment, including Hungary's risk perception, has improved significantly in recent times, driven by external and internal factors. "In response to the reduction in the risks of extreme scenarios, the Council has decided to narrow the interest rate corridor," the MNB added.

The previous change in the base rate was a 125 basis points hike in September last year, while the lending rate was raised by a massive 950 basis points in October.

The steep cut to the lending rate did not come as a surprise as the MNB Deputy Governor Barnabas Virag had already signaled such a move this month. The policymaker had also suggested that a reduction in the deposit rate would come up for discussion only in May. "The decision to kick-start the policy normalization process seems to have been driven by several factors, including a recovery in the forint, a narrowing in the current account deficit and evidence that headline inflation has passed its peak," Capital Economics economist Nicholas Farr said. Capital Economics expects cuts to the effective policy rate, which is the overnight daily deposit rate, to follow in the coming months. The daily deposit rate is likely to be cut by 100bps in June to 17.00 percent and lowered by a further 400bps to 13.00 percent by November, Farr said. The MNB expects economic growth to pick up in the second half of this year as inflation slows markedly and investment recovers. Further, both internal and external factors are projected to make a positive contribution to growth in 2024. The central bank expects GDP to grow by 0.0-1.5 percent this year, by 3.5-4.5 percent next year and by 3.0-4.0 percent in 2025.

Policymakers forecast a pick up in the pace of decline in the consumer price index in the next months, which will also be supported by the growing impact of base effects from the middle of the year. The bank expects the tight monetary conditions to have broader disinflationary effects. The central bank forecast inflation to return to its tolerance band in 2024.

The bank projected inflation to be 15.0-19.5 percent this year, 3.0-5.0 percent next year and 2.5-3.5 percent in 2025.