Forint Rally Gives Hungary Room to Ease Policy Further

Key Moments

Policy Decision and Inflation Backdrop

Commerzbank analyst Tatha Ghose noted that Hungary’s central bank, the MNB, left its benchmark interest rate unchanged at 6.25%. The decision was widely expected and aligned with the bank’s previous communication that it would maintain a wait-and-see stance until updated projections in June were available.

According to Ghose, policymakers are proceeding cautiously due to heightened inflation risks associated with the Iranian conflict and persistently high global energy prices. Despite these concerns, he highlighted that underlying inflation indicators, especially seasonally adjusted month-on-month changes in core HICP, have improved significantly.

Forint Strength Creates Room for Easing

Ghose emphasized that the sharp strengthening of the Hungarian forint has been a key factor in opening space for monetary easing.

“The forint’s post-election appreciation, gaining over 7% year-to-date and making it the clear top performer in CEE, combined with notable improvement in underlying inflation indicators (seasonally-adjusted month-on-month changes in core HICP) are strong enough that MNB will likely find room for a couple of rate cuts in coming months.”

He added that the Monetary Policy Council recognized the policy flexibility created by the currency’s rally.

“However, the MPC acknowledged the clear rate cutting room created by a significant forint rally (which MNB chief, Mihaly Varga, attributed to a decline of risk premia – which may be correct, but just to be clear, it is an exogenous rally produced by the election outcome)”

Central Bank Communication

Ghose pointed out that the MNB’s messaging has been consistent. The decision to keep rates unchanged at 6.25% followed its prior guidance to wait for June’s updated macroeconomic projections.

“Hungary’s National Bank (MNB) kept its key interest rate flat at 6.25% yesterday, a widely anticipated decision consistent with its communicated guidance to wait-and-see until updated June projections were available. This cautious approach is necessitated by increased inflationary risks stemming from the Iranian conflict and high global energy prices.”

He also referenced earlier remarks from policymakers regarding the role of exchange rate strength in guiding future decisions.

“Deputy Governor Zoltan Kurali had previously signalled that a stronger forint could enable rate cuts, pending evaluation of updated inflation forecasts in the June Inflation Report. Varga basically repeated the same view yesterday. MNB is satisfied with the improved inflation outlook, now described as “more moderate” (despite current global energy price concerns).”

Market Pricing and Commerzbank’s Outlook

Ghose contrasted prevailing market expectations with Commerzbank’s own view on the likely pace of easing.

“The forward market is discounting a 25bp rate cut in 3-6 months – we think that 50bp is more likely. We do not anticipate a negative impact on the exchange rate from 50bp lower interest rates. We expect EUR/HUF to trade around the 360.0 level over the coming quarter.”

Summary of Key Metrics