Analysts are divided on the rate-cutting prospects at tomorrow's Monetary Council

HUNGARY - In Brief 26 Feb 2024 by Istvan Racz

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The stake for tomorrow's regular monthly rate-setting meeting is whether the Council opts for the standard 75 bps reduction of the currently 10% base rate, or it increases the speed slightly, to a 100 bps cut this time. Honestly, the difference is not that big from the point of view of long-term policy, but there is considerable tactical relevance of the decision, for the short-term positioning of the forint's exchange rate, the key monetary variable. In January, in a rarely occurring split voting, seven members voted for a 75 bps cut and two for 100 bps. Since then, foreign policy risks have been reduced (veto on Ukraine revoked, Swedish NATO accession approved), inflation was less than expected in January, Q4 GDP figures were weaker than expected, leading central banks have not become any more optimistic, and the forint is the same relatively weak as it was then. The median analyst expectation was -75 bps in Portfolio.hu's poll, but this is somewhat misleading, because the analyst vote was also split on the subject, five participants of the survey expecting 75 bps and the remaining four forecasting 100 bps. This split almost perfectly reflects our own view: we expect 75 bps, but we are not sure at all. The key issue to decide is if the surprisingly low January inflation number should push decision makers to go for the bigger cut or not. Most analysts seem to be saying YES, but we are not sure, as from this lower actual level of the headline rate, it will be more difficult to maintain the decreasing trend of inflation in the rest of 2024. Perhaps most importantly and meaningfully, the median analyst's base-rate expectation for end-2024 is 6.5% (slightly lower than our...