No surprise from the Monetary Council today

HUNGARY - In Brief 25 Jul 2023 by Istvan Racz

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Fully in line with analysts' widespread expectation, the Council decided to reduce the O/N deposit rate by 100 bps, to 15% today. Simultaneously, the repo rate was cut to 17.5%. The base rate remained unchanged at 13%. By meeting the unanimous analyst expectation, the Council actually met two of the principles which it had set for itself as a guidance for the ongoing loosening cycle: calculability and clear communication. The other principles are caution, gradualism, and that the process be based on the continuous analysis of market conditions. Actually, caution and gradualism were also clearly adhered to. The Council said it intends to continue cutting the sterilisation rate at the same pace, until it is unified with the 13% base rate once again, assuming no change in its current risk assessment. On this basis, analysts generally expect the unification of the two rates to happen in September. At his usual post-meeting presentation, vice governor Virág refused to give away any specifics regarding the path of the base rate the Bank expects for Q4. However, he said a few things on the Council's macro assessment. Essentially, this has not changed since the late-June inflation report: improving current account, further rapid disinflation, some minor improvement by growth in Q3, after a poor Q2, and significant recovery in Q4. He said they see no reason to revise their inflation forecast compared to the June inflation report. They still expect CPI-inflation materially below 10% at year-end, and a substantial decrease by core inflation. But he did not say that core inflation will be below 10% in December, too. He added that the real interest rate may become positive in a bac...