MNI NBH WATCH: Rates Held, Inflation Risks Tilt Upwards

The Hungarian National Bank kept its base rate unchanged at 6.5% on Tuesday and said that despite inflation peaking last month it will likely take longer to return to target than previously seen, amid strong service price growth, and heightened geopolitical and trade uncertainty. (See MNI EM NBH WATCH: New Governor, New Projections, Same Base Rate)

Members of the Monetary Policy Council were unanimous in supporting a policy hold, Governor Mihaly Varga said in a press conference, with no discussion of alternatives. 

In common with previous NBH statements, Varga emphasised that the base rate can also remain at its present level for a “sustained period,” with positive real rates helping to keep inflation expectations anchored in the face of upside risks from tariff hikes, food and services prices.

CPI inflation is expected to decline after peaking in February, but the new projections’ baseline scenario assumes risks are tilted to the upside, the Bank also said in a statement.

“The alternative scenarios highlighted by the Council assume rising trade tensions, deterioration in emerging market sentiment, easing of geopolitical tensions and fiscal stimulus in Europe.”

The NBH said it expects CPI annual inflation to be 4.5–5.1% in 2025, compared with the 3.3-4.1% it expected in December 2024. The pace of price growth will fall to within the tolerance band at 2.9-3.9% in 2026, versus the 2.5-3.5% seen last year.

The outlook for 2025 growth was cut from the 2.6-3.6% seen at end 2024 to 1.9-2.9%, but rose over the medium term, with Hungarian GDP expected to expand by 3.7-4.7% next year and 2.8-3.8% in 2027, thanks in part to increased EU fiscal spending.

“Due to prolonged geopolitical conflicts and intensifying trade policy tensions, the global economic environment continues to be uncertain. In the U.S., the risk of a slowdown in economic activity has emerged,” the NBH said.

“In the EU, the easing of fiscal rules and the programmes for expenditure hikes announced in recent weeks may boost economic growth which has been subdued for years.”

Varga reiterated in the statement the necessity for adopting a “careful and patient approach” to monetary policy in pursuit of meeting the NBH’s inflation target in a “sustainable manner.

But he was clear that achieving the 3% target has been delayed, with the uncertain international environment and the outlook for inflation warranting the maintenance of tight monetary conditions.