NBH May Restart Rate Cuts While Forint Stays Weak

Key Moments

NBH Policy Outlook and Inflation Backdrop

ING’s Frantisek Taborsky expects the National Bank of Hungary (NBH) to resume monetary easing, following what he describes as the last rate cut in September 2024. He points to a sharp drop in January inflation to 2.1%, which he notes is significantly below the central bank’s target. According to him, most underlying inflation indicators are also showing a favorable path, supporting the case for additional easing.

He notes that “The big day for the National Bank of Hungary is here, and we expect a restart of the cutting cycle after the last rate cut in September 2024. All the important metrics and market developments suggest that this is imminent. January inflation showed a sharp decline to 2.1%, well below the NBH target, and most underlying measures also show a favourable trend.”

Market Pricing and Rate Expectations

Taborsky indicates that financial markets largely regard the NBH’s latest decision as a foregone conclusion. He also highlights expectations for a further cut in March, consistent with his forecast.

He states that “Today’s decision to cut rates seems like a done deal from the market’s perspective, and at the same time, another rate cut in March in our forecast should not be a surprise. Even so, the focus will be mainly on the central bank’s forward guidance. Although near-term cuts are priced in, we believe that the market can price in a lower terminal rate than the current 5.25%.”

EUR/HUF Dynamics Around Policy Decision

On the foreign exchange side, Taborsky frames the key issue for markets as the direction of EUR/HUF. He observes that the pair is trading just above levels he characterizes as local lows, and also as the lowest in the past two years. He suggests this positioning is one factor behind the central bank’s willingness to move ahead with more rate cuts.

He notes that “From the market’s perspective, the main question should be the direction of EUR/HUF. The currency pair is only moving just above local lows, the lowest in the last two years, which is one of the reasons why the NBH is willing to return to rate cuts.”

Short-Term FX Reaction and Trading Behavior

While Taborsky acknowledges that the expected rate move is already factored into pricing, he still anticipates some immediate reaction in the currency market.

He comments that “Although the market is pricing in today’s rate cut, some upward pressure on EUR/HUF can be expected. On the other hand, the market has repeatedly shown that any upward movements are a good opportunity for new HUF longs, which may be the case today as well. Therefore, overall, we do not expect much from FX today at levels around 379-380, although intraday volatility will be increased.”