MNI INTERVIEW: NBH Could Hold Rates Beyond Jan - Ex-Gov Simor

The National Bank of Hungary is unlikely to cut interest rates this month and may not do so before the spring, former governor Andras Simor told MNI. (See MNI EM INTERVIEW: NBH To Cut In Feb, Then Wait And See - Kiraly)

While the Bank’s move last month to a data driven, meeting-by-meeting mode initially raised speculation of a cut from 6.5% at the first meeting of 2026, Simor said December’s 3.3% inflation reading and subsequent NBH comments aimed at stabilising the forint had pared back expectations, though easing may still be debated on Jan 27 after three years of sluggish economic growth.

Services inflation rose from 7.2% to 7.6% between November and December, “and service inflation is always something that central bankers look at very carefully, because it’s a good indicator of the underlying inflation trends in the economy,” noted Simor. 

“Additionally, inflation expectations are still in double digits. The MPC also said in December that they will pay particular attention to price-setting patterns at the beginning of the year, the results of which they will not see before mid-February at the earliest.”

It is “99.9% likely” that the government’s cap on profit margins - described by the NBH pre-December as having a “significant diminishing effect on inflation”- will be extended beyond February, Simor said, though prices will go up “immediately, or very soon after” it is lifted.

“They need to consider the effects of lifting the cap - even though, when they make projections, as they did in December, they follow a rules-based system which means they only take into consideration government decisions that have already been made.”

GENERAL ELECTIONS

It is also possible that Prime Minister Viktor Orban will continue to offer handouts in a bid to sway voters before April’s general elections, which Simor said could see the fiscal deficit increase above 5%.

“The rating agencies are watching this very carefully, and they might be tempted to downgrade Hungary if they see budgetary targets missed. That could lead to weakening of the forint and an increase in the Hungarian risk premium, in which case the central bank would need an interest rate cushion to defend the currency.”

NBH governor Mihaly Varga has made clear that he wants to keep the forint stable, Simor said.

“I would therefore guess that they are not going to cut in January, and it will depend entirely on what happens between January and April as to whether they cut at all before the election. It’s going to be a very turbulent period.”

While a cut before April would be good news for the incumbent government, and cannot be ruled out given Varga is a former finance minister for the governing Fidesz party, nor can it be assumed, Simor said.

“I do think they are trying to divorce themselves from politics and instead follow purely economic and financial rationales - as reflected in the fact that they have been cautious and conservative over the past year. If they mean that, then I would think that a cut is not appropriate at this point.”

Opposition party TISZA will face substantial challenges even if it wins, Simor said, with a two-thirds parliamentary majority needed to remove Fidesz loyalists from numerous high-powered civil service and judicial roles.

“This Fiscal Council in particular has very big powers, and could veto the new government’s budget,” Simor said.