CORRECTS-MNI NBH WATCH: Rate Hold Seen; Projections Key

(Corrects day of decision in first paragraph)

The National Bank of Hungary is set to leave interest rates unchanged when it meets on Tuesday, although December’s macroeconomic projections may provide clues as to the timing of the first cut in 2026. (See MNI EM NBH WATCH: Rates Held At 6.5%, Inflation Seen Moving Lower)

Headline inflation fell from 4.3% in October to 3.8% in November, due largely to negative contributions from food and fuel prices, but sticky price inflation edged up to 5.4%.

December’s staff forecast should see a small downward revision to this year’s final inflation figure,  confirming November’s assertion that it “decline into the tolerance band by the end of 2025 and temporarily decrease further at the beginning of 2026.” 

Policymakers are well aware that a combination of base effects and profit margin shields make assessing the outlook more complex. The latter, though scheduled to end before March, could well be extended into April’s general election. Either way, the eventual removal of these caps will see price pressures spike, at the same time as political risks become more pronounced.

EXCHANGE RATE

The Monetary Council is also sensitive both to any exchange rate deterioration - the forint sold off by around 1% on Friday’s reports of PM Viktor Orban’s putative plans to become president, before recovering - and to household inflation expectations, which remain elevated. (See MNI EM INTERVIEW: US-Hungary Swap Deal Sign Limits Will Be Tested)

Fiscal policy is seen providing some pro-inflation impulse in the run-up to next year’s hotly contested poll. And while Hungary avoided a ratings downgrade despite announcing higher fiscal deficits, the months ahead are likely to prove volatile. (See MNI INTERVIEW: Hungary To Dodge Debt Downgrade-Ex-NBH Official)

The policy rate is all but certain to stay at 6.5% for a 15th consecutive meeting, with the interest rate corridor of +/- 100bps also unchanged and the tone hawkish. Yet it remains to be seen whether next year's outlook prompts the NBH to begin gently preparing the ground for a first-quarter cut, or if it will instead signal its intent to look through any short-term dips in the data.