The Hungarian central bank decelerates rate cuts having forint in mind

The Hungarian central bank lowered its benchmark policy rate to 8.25 pct. Today’s decision marks a step back in the pace of monetary easing and is accompanied by a hawkish statement. The EU’s highest borrowing costs were reduced by 75 bp, down from 100 bp in February. As a result, the central bank returned to the pace of the cuts that had been delivered since October 2023. The cumulative reduction scale amounts to 475 bp, and the cycle has already crossed the halfway mark. The monetary authorities will be reluctant to lower the key rate below the 6.50 pct mark in the remainder of 2024.

The sharp disinflation at the beginning of the year provided an opportunity to accelerate the easing in February. Although the annual inflation rate has fallen sharply below 4 pct year-on-year, underlying price pressures suggest that the central bank's target of 3% is still some way off. However, the more cautious approach is mainly due to the recent weakness of the beleaguered forint. The Hungarian currency is one of the worst performers in the EM space. Since the beginning of the year, it has depreciated by more than 3 pct against the euro. The EUR/HUF exchange rate is hovering close to the 400.00 mark and at the highest level in a year. What is more, the forint underperforms regional peers. It touched all-time lows against the Polish zloty in the first part of March.

The recent sell-off has not only been driven by aggressive interest rate cuts, while major central banks have managed to push back expectations of an easing cycle. The renewed rise of political risks has played a significant role. The spat between the central bank and the government adds to the ongoing feud with the EU. Prime Minister Viktor Orban has explicitly called for a more accommodative monetary policy stance on numerous occasions. Unsurprisingly, efforts to revise the central bank law are perceived as a threat to monetary independence. Although these plans for the second half of the year were shelved on Monday, the risk premium is likely to remain elevated.

Long-standing external and internal imbalances have not diminished as well. The HUF is permanently characterised by the most fragile macroeconomic backdrop in the CEE3 region, which is reflected in its relatively high volatility and dependence on global risk appetite. The environment should become more supportive of the EM currencies as the Fed and ECB look set to start cutting rates in June. Moreover, the narrowing of the interest rate differentials has already taken a toll on the HUF. Nonetheless, fintech Conotoxia forecasts that the forint will remain the most vulnerable CEE3 currency amid pronounced political risks and a weak fundamental backdrop. The EUR/HUF exchange should be unable to grind substantially lower from the 400 mark, which might be temporarily breached during the episodes of surging risk aversion.