MNI INTERVIEW: NBH To Cut In Feb, Then Wait And See - Kiraly

Hungary’s central bank could still lower interest rates once before April’s general election, former deputy governor Julia Kiraly told MNI, with a 25-basis-point cut in February most likely after December’s 3.3% inflation print exceeded the NBH’s end-of-year projections. (See MNI EM NBH WATCH: Rates Held At 6.5%)

Kiraly said she was not surprised by December’s figure though the pickup in the pace of market services price growth, which rose from 7.2% to 7.6% (+0.6% MoM) was hard to explain. In its December Inflation Report, the NBH had anticipated that inflation would briefly decline below the 3% target at the beginning of 2026, before rising temporarily towards the upper bound of the tolerance band. 

But while the possibility of a January cut has all but vanished - after the NBH amended its forward guidance last month to indicate it will move in a “cautious and data-driven manner from meeting to meeting” - the economic case remains for lowering rates by a quarter point in either February or March, Kiraly added.

“Even were politics not a consideration, a cut could be justified,” she said, citing “fear of stagnation” as a major factor in the NBH’s decision-making. 

Twenty-five basis points "is only a signal," Kiraly said. "It doesn’t help the government to boost the economy. So I am more or less 100% sure about a 25bp cut in February, after which it will be a case of wait-and-see.”

DOVISH TONE

While the NBH raised its 2027 inflation forecast - from 3.0% to 3.3% - and indicated that the rate of price increases may only return sustainably to target in 2028, the overall tone of December’s report was dovish.

This was despite the assumption in the Bank’s forecast that government price shield measures - previously credited by the NBH as having exercised a “significant diminishing effect on inflation” - will be removed at the end of February as promised, Kiraly noted.

“They’ve run a number of scenarios and seem to be confident that the end of the price shield - whenever it comes - won’t lead to a surge in inflation because companies will absorb the opportunity cost of price caps, having made good profits on items outside their scope. I’m not convinced, but they appear to be.”

The only significant upside risk the central bank could face in the immediate term is global market volatility and a weaker forint, though for the moment the currency is enjoying a period of stability, Kiraly said.

“If anything happens to oil or the gas price it would immediately have a negative effect on inflation. Food price inflation is already so high that base effects will bring it down, and all the snow we are having this year will be better for agriculture. In fact, there is a possibility it will be a really good year because of all the additional water.”

Election front-runner Peter Magyar’s TISZA party, which hopes to unseat Fidesz Prime Minister Viktor Orban, nevertheless faces a testing time even if it wins April’s hotly-contested parliamentary poll, Kiraly said.

“We don't know what will happen after the elections, but it will be a very difficult task to do anything with the country. If the opposition win, the only positive effect will be that the European funds will be announced, and this will have a positive effect on the ratings agencies and the general feeling of the market. But they will not arrive immediately.”