Hungary's central bank left its base rate at 5.50% on October 20 for a second month, keeping its easing cycle on pause although inflation is running well below target.
The Monetary Council of the Magyar Nemzeti Bank (MNB) also kept the overnight deposit rate at 4.50% and the overnight collateralised lending rate at 6.50%, it said in a statement after the meeting. Every analyst polled by LSEG had expected the hold, Capital Economics said in a note on the decision.
“The high level of energy prices, the rising yield environment, as well as the uncertainty surrounding the global economic and financial market outlook warrant a careful approach to monetary policy,” the council said.
The pause leaves Hungary with a real interest rate of almost 4 percentage points, with consumer price inflation at 1.6% in September. The MNB has tied its room to cut partly to how markets receive the 2027 budget, the first drawn up by Prime Minister Peter Magyar's Tisza government, which he presented to parliament on October 19. A deputy governor had already said in September that there was scope for cuts if the fiscal outlook cleared.
“Economic policy measures, as well as their market reception, have an effect on the room for manoeuvre of monetary policy,” the council said in its forward guidance. It will set rates “in a cautious and data-driven manner”, it added.
The MNB's base rate has been on hold at 5.50% since August while inflation has run below the 3% target since January. Source: MNB, BIS, KSH and IMF via IntelliNews Lambda.
Inflation came in at 1.6% in September, up from 1.3% in August but below the 1.8% consensus and under the bottom of the MNB's 2-4% tolerance band. Core inflation was 1.9%. The MNB said the rise came from fuel prices, while food prices kept falling and annual price growth in market services picked up slightly.
The central bank still expects inflation to climb, averaging 1.8% this year and 3.1% in 2027, driven mainly by fuel prices and a change in excise duty on tobacco. It said inflation will fall back to its new 2.5% target by the end of the monetary policy horizon. The MNB cut the target from 3% at its September meeting, effective January 1, 2028, with the tolerance band left at plus or minus one percentage point, according to the council's statement on the target review.
Inflation in the euro area and the US “considerably exceeds” central bank targets, and market pricing suggests the European Central Bank, the Federal Reserve and the Bank of Japan may raise rates again after their September hikes, the MNB said. Romania's and Poland's central banks both left rates unchanged in October. Governor Mihaly Varga's press conference slides show the forint holding in the stronger range of recent months; it fixed at 364.68 to the euro at the ECB's reference rate on October 20.
The 2027 budget targets a deficit of 4.9% of GDP, down from an expected 7.5% this year. It assumes GDP growth of 2.4% and average inflation of 3%, with public debt edging down to 77.2% of GDP at the end of 2027 from 77.5%, the Budapest Business Journal reported. The government plans to cut the deficit to 4% in 2028, 3.4% in 2029 and 2.8% in 2030, under the EU's 3% ceiling. Fitch Ratings had warned of a downgrade without a credible fiscal adjustment.
Capital Economics' Nicolas Crittenden said the plan points to a modest net tightening of fiscal policy, and that spending cuts and higher taxes should soften domestic demand, making the budget less of an obstacle to hitting the lower target. The research house expects inflation to average 3.4% in 2027.
“Although an interest rate cut is a possibility at one of the two remaining meetings this year, our base case is still for a prolonged hold in rates,” Crittenden wrote, adding that the risks to that forecast are skewed towards a cut.
Local economists are split. Of 10 analysts surveyed ahead of the meeting, half expected one more 25bp cut before the end of the year, with December the meeting most often named, provided the budget convinces investors. The abridged minutes of the October 20 meeting are due on November 4.