Hungary likely to cut key rate by 1% amid recession

August 29, 2023 (MLN): Hungary will likely cut its key interest rate by a full percentage point, taking a step closer to ending an emergency monetary regime as policymakers try to combat the country’s longest recession since at least 1995, as Bloomberg reported.

The central bank will cut its overnight interest rate to 14% on Tuesday, according to all 12 analysts in a Bloomberg survey.

The move will bring the instrument, which was made the key rate in October to stem a plunge in the forint, one step away from the benchmark rate, which is expected to be kept at 13%.

Hungary’s economy has contracted for four consecutive quarters as consumers and companies struggle with the European Union’s fastest inflation and highest borrowing costs, which have depressed consumption and production.

With annual inflation slowing from a peak of more than 25%, the central bank began normalizing monetary policy in May by cutting the key rate from a peak of 18%, when it started a cycle of 100-basis-point monthly reductions to loosen the shackles on the economy.

It has emphasized a “cautious but resolute” approach to continue cuts until the key rate aligns with the base rate in September, but it hasn’t revealed plans beyond that horizon.

After converging in next month, the main rates may drop to 11% by year-end, according to the median forecast in a Bloomberg survey.

That’s a departure from last fall, when policymakers triggered a forint selloff by fulfilling a pledge to stop raising the benchmark rate at 13% and then had to hike the overnight rate to 18% and make it the key policy tool to stop the rout.

“The Monetary Council seems to have learned from last September’s mistakes and will not commit to a path too early,“ Zoltan Arokszallasi, an analyst at Hungarian brokerage Equilor said. “Because of that, I don’t expect much guidance by policy makers on Tuesday on the steps to be taken after September.”

Hungary’s economy is expected to contract this year by 0.3%, according to a Bloomberg survey, confounding the government’s forecast for growth.

Nevertheless, rate setters are unlikely to speed up monetary easing because big swings would go against its earlier guidance and could unnerve investors, Mariann Trippon, an analyst at CIB Bank Hungary said.

The central bank is also closely watching the forint, which has lost 2% against the euro since the start of rate cuts.

It is still seen to be within the central bank’s tolerance range, as it’s still close to 8% stronger against the euro from a year ago, and is contributing to faster disinflation.

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