The MNB base rate was reduced by another 50bps today

HUNGARY - In Brief 21 May 2024 by Istvan Racz

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At today's monthly rate-setting meeting, the Monetary Council decided to cut the base rate further to 7.25%, exactly as expected. After the meeting, vice governor Virág spoke again, as usual. He painted a positive picture, mentioning a disinflationary global environment, the recent increase in investors' risk appetite, Hungary's recently improved risk assessment, and the domestic economy's good performance on inflation, growth, the BOP and international reserves. Yet he maintained a fundamentally cautious approach, mentioning the remaining relatively high level of global inflation and interest rates, geopolitical risks and the expected temporary increase in domestic headline inflation in the coming months, this time around blamed on services prices and base effects. Mr. Virág said he could give forward guidance only until end-June, when the base rate may be expected between 6.75-7%. In H2, he saw only 'very limited scope' for further rate cuts, but he declined to be more specific. The MNB expectation is that disinflation will probably get further momentum in early 2025, when the annual repricing of unregulated services will likely result in smaller upward adjustments than this year, because base-year inflation, a key determinant of repricing decisions, will be lower than it was early this year. (This makes sense, we would add here, but current-year wage growth will be important, because the service sector's repricing decisions are substantially determined by base-year wage increases in this fundamentally labor-intensive sector. The MNB currently expects 10.5% nominal wage growth for 2024, following 14.2% in 2023.) Asked if the MNB still wanted to maintain a real positi...