On the next week on Tuesday, the National Bank of Hungary (NBH) will hold its next monetary policy meeting. They’ll all address an evolving economic landscape rife with tempered optimism and monumental hurdles. In addition to the dovish tone that the Hungarian economy has taken since the central bank’s last meeting in March. A number of other factors continue to muddy the picture and potentially shape future monetary policy.
Now, Hungary is undergoing a rather atypical inflation environment. Therefore, the NBH is likely to hold its policy rate at 6.50% through year-end. Although recent data shows a promising decline in Hungary’s inflation rate—dropping to 4.7% year-on-year in March from a peak of 5.6%—concerns linger regarding core inflation, which remains persistently high at 5.7%.
Economic Indicators and Inflation Trends
The latest economic indicators point to a complex, even contradictory, picture of the state of the Hungarian economy. The drop in the inflation rate provides some relief to policymakers. The core inflation figure indicates that underlying price pressures are still evident. The bank’s complicated decision-making process is overwhelmed by these mixed signals. It is continuously evaluating how the government’s policies and operations might present risks to the inflation outlook.
Additionally, Hungary’s economic data often has disappointed analysts, undershooting expectations and further sounding alarms over the state of Hungary’s economy. Unfortunately, external factors, such as the threat of US tariffs on EU cars, have only exacerbated this trend. Indeed, they risk dragging down Hungary’s already rosy GDP projections for this year and next. The NBH is taking this cautious approach given the country’s uncertain economic trajectory. Indeed, some forecasts are predicting inflation to go above 4% for the foreseeable future.
The Global Context and Forward Guidance
Since the NBH’s last meeting, the global economic landscape has changed considerably. Although necessary, this abrupt change has added a wave of turbulence and a risk-off sentiment, further damaging Hungarian financial assets. The central bank is sticking to its forward guidance for the time being. Yet they have resisted any abrupt policy reversals despite the domestic backdrop shifting decidedly to favor a more dovish approach.
Market analysts have pointed out that while Hungary’s inflation picture may appear slightly improved, the underlying economic fundamentals remain weak. Monetary policy expectations should be tempered. Read our full analysis of the rate hike. Rates are expected to remain at 6.50% until the end of 2023. While addressing these global aspects, the NBH partially adopts a defensive posture in addressing rising challenges at home. At once, though, it manages to deftly sidestep international pressures.
Future Outlook and Rate Projections
When looking ahead, the NBH is under heavy duress to make a timely and appropriate response to an ever-more difficult fiscal situation. Indeed, a few economists believe the initial cut could come as soon as March of next year. Others aren’t so sure, due to persistent risks that might upend economic stability. Given the risk of inflation rising and the clear risk to economic growth, this calls for a careful and calculated approach from the central bank.