Forint Strengthens as Markets Eye MNB Policy Shift

Key Moments

Commerzbank View on MNB Policy Signals

Commerzbank strategist Tatha Ghose points to a strong advance in the Hungarian forint after a Bloomberg report indicated that the National Bank of Hungary (MNB) might suspend its rate-cut cycle at the 22 September policy meeting and is considering reducing its inflation target. The report, citing unnamed MNB sources, has not been confirmed, but Ghose notes that such a move would be in line with the central bank’s more cautious tone in August.

According to Ghose, both a temporary halt to easing and a lower inflation target would likely be constructive for HUF by directly addressing inflation risks and alleviating market worries about continued monetary loosening.

Recent Policy Moves and Inflation Dynamics

Ghose underscores that the reported policy shift would follow the central bank’s decisions at the previous meeting. In August, the MNB lowered its base rate by 25bp to 5.50%. However, it did not commit to additional rate cuts, stating instead that the future rate trajectory would be determined in September once updated projections are available. Ghose characterizes this as a less dovish message from the central bank.

He also highlights a nuanced inflation picture. July headline inflation stood at 1.2% year-on-year, which he describes as offering policymakers a favorable opportunity to reduce the inflation target without needing to immediately tighten policy. At the same time, he stresses that the annual figure does not capture the full situation: on a seasonally-adjusted month-on-month basis, inflation has accelerated to a pace above the 3.5% target. Ghose adds that this development may not be widely recognized by all market commentators.

Implications of a Potential Pause and Target Cut

Ghose argues that suspending rate cuts would give the MNB room to monitor these inflation dynamics more closely, while also allowing markets time to absorb a potential reduction in the inflation target. He notes that this would occur against the backdrop of government fiscal plans that remain uncertain.

He contends that such a policy configuration – a pause in easing alongside a lower target – would be seen by investors as a more robust framework for containing inflation risks, which in turn would help underpin the currency.

Market Reaction and Forint Performance

The foreign exchange market reacted strongly to the Bloomberg report, according to Ghose. He observes that the forint posted a sharp intraday advance following the news, recording its biggest gain since the move after the election in April.

Ghose views the market response as logical, given that ongoing MNB rate cuts during a period of external inflation risk had been perceived as a key vulnerability for the forint. In his assessment, any official confirmation that the central bank intends to pause rate reductions at the September meeting and potentially beyond would deliver a significant boost to HUF.