No policy change at today's Monetary Council, as expected

HUNGARY - In Brief 27 May 2025 by Istvan Racz
The base rate remains at 6.5%, and the interest rate corridor has also been left at 5.5-7.5%. The Council expect headline CPI-inflation close to (meaning not a lot above) the target range. They continue to aim at maintaining the stability of financial markets (in our reading this primarily means the stability of EURHUF) and at anchoring (= reducing) inflationary expectations. No change in the Council's forward guidance either; they gave no signal that they would see any room for a rate cut in the foreseeable future.In our view, which we have elaborated on a few times lately, the Council's conclusion regarding inflation prospects is correct, because of relatively high core inflation, decreasing but still high inflationary expectations, and expected global market volatility. In addition, it appears that the MNB is currently building up credibility, which is completely in order, given its new management, the independence of which was questioned by the public audience still before their actual takeover.Now, the question may be asked why the MNB is not carrying out any cautious and modest loosening, in the face of the weakening economy, the current relative strength of the forint, and decelerating wage growth. One possible answer is that the current MNB management, including the Council, is indeed independent, another one is that the government are not pushing for the loosening of central bank policy either, and a third one is that it may be a combination of the first two. Our own hypothesis, which may be no better or worse than anyone else's, is that the key government decision-makers are currently more afraid of high inflation than of low growth, on a well-argued basis of...

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