Hungary’s Central Bank Keeps Rates Unchanged
The National Bank of Hungary has decided to keep its interest rates unchanged at 6.50%, as was expected. However, the bank’s tone has taken a surprising turn, with a notable shift towards being more dovish. This means that the bank is now more likely to cut interest rates in the future, rather than raising them.
What Does This Mean for the Economy?
The bank’s new forecast shows that inflation is expected to be lower than previously thought, at 3.2% on average next year. At the same time, the economic outlook has worsened. However, the bank’s governor, Mihaly Varga, has stated that he will evaluate new data on a meeting-by-meeting basis and will be ready to cut rates if the numbers are favorable.
Impact on the Market
The market had been preparing for a possible dovish tone from the bank, but the extent of the shift has still managed to surprise. As a result, rate markets have priced in an additional 10bp of rate cuts next year, for a total of 60bp. The terminal rate has also fallen to 5.72% in 2027. This means that the market is now expecting the bank to cut interest rates more aggressively than previously thought.
What’s Next for the Hungarian Forint?
The Hungarian forint (HUF) had initially gained against the euro, but has since reversed its gains and is now weakening slightly. Despite this, analysts believe that the EUR/HUF exchange rate will still go up in the coming days. The rate differential between the euro and the HUF is heading towards its narrowest levels since May, which suggests that the EUR/HUF exchange rate could rise to around 386-388.
Support from External Factors
The dovish turn from the Hungarian central bank comes at a favorable time, with the region receiving support from growing hopes for a peace agreement between Ukraine and Russia. The HUF is likely to benefit the most from this development within the Central and Eastern European (CEE) region. Additionally, the euro is testing new highs against the US dollar, which could also mitigate the upside risk in EUR/HUF.
Conclusion
In conclusion, the Hungarian central bank’s decision to keep interest rates unchanged, combined with its dovish tone, has opened the door to future rate cuts. This has led to a surge in expectations for deeper easing, with the market now pricing in more aggressive rate cuts. As a result, the EUR/HUF exchange rate is likely to face renewed upside pressure, potentially rising to around 386-388 in the coming days. However, external factors, such as the prospects for a peace agreement between Ukraine and Russia and the euro’s performance against the US dollar, could influence the exchange rate and mitigate the upside risk.
