MNB's Virág is hinting on the future path of rate cuts

HUNGARY - In Brief 20 Jun 2023 by Istvan Racz

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At today's rate-setting meeting of the MNB, everything went as expected. The Council decided on a uniform 100 bps reduction of the O/N deposit rate, the repo rate and reverse FX swaps, leaving the base rate and the low end of the interest rate corridor unchanged. Mainly, the O/N depo rate (= the sterilisation rate) fell to 16%, and the repo rate (= the top end of the interest rate corridor) was reduced to 18.5%. The main reason why it is still worth releasing a note on the event is one specific statement made by Mr. Virág after the meeting. Asked when he expected the unification of the sterilisation rate and the base rate, he said that the current majority view on the market appears to be the unification to happen in September, and he believed it sounded like a realistic scenario, based on currently known information. This is clearly hinting at a significant likelihood of three further steps of 100bps in July, August and September, to reach the current level of the base rate at 13%. As we said yesterday, analysts asked by Portfolio.hu had a median expectation on the sterilisation rate in December at 10.5%. On the MNB's new forecast on average CPI-inflation for 2023-2025, Mr. Virág presented the following chart. He added that the forecast range for the average headline rate in 2023 narrowed from 15-19.5% (left-hand light blue field) to 16.5-18.5% (right-hand light blue field and blue text), that the inflation path expected for 2024 shifted mildly upwards because of newly announced excise tax increases in January 2024 (chart title), and that headline inflation is now expected to return to the Bank's 2-4% tolerance range in early 2025.