National Bank of Hungary Review: A quiet end to an eventful year

In our NBH preview, we argued that the macro outlook could support an easing policy, but the Hungarian forint is simply not ready for such a move. Despite the recent strengthening of the HUF, the National Bank of Hungary decided to play it safe, citing volatile global investor sentiment and ongoing geopolitical tensions, which increase upside risks to inflation.

Therefore, the outcome of the December meeting came as no surprise: the National Bank of Hungary kept its key interest rate on hold at 6.50% on 17 December, the last meeting of 2024. Thus, the easing cycle in 2024 included a total of 425bp of easing in the key rate. Policymakers also left the interest rate corridor unchanged, with a range of +/- 100bp around the key rate.

As usual, Deputy Governor Virág assessed the macroeconomic situation at the press conference. Regarding the general economic situation, the National Bank of Hungary is somewhat optimistic about the future. Credit activity, consumption, the level of orders in the construction sector and new manufacturers will boost economic activity in 2025. Regarding the latter, the central bank's staff calculated a +0.6ppt impact on GDP growth from the production of new investments in the manufacturing sector (BMW, BYD, CATL).

From a longer-term perspective, the National Bank of Hungary highlighted the country's improving fundamentals, such as the surpluses in the external balances, the near-zero primary budget deficit, the still favourable debt trajectory relative to peers and the expected rebound in economic growth. The only caveat is the inflation outlook on the macro side.

The main macro-related message, in our view, is that the expected inflation path for 2025 has shifted upwards by around 0.5 percentage points in the December forecast. Thus, while the central bank expects inflation to remain mostly within the tolerance band of the inflation target, reaching 3% in a sustainable manner is delayed until 2026. This change in itself supports the Monetary Council's narrative of an extended pause in interest rates.

The Monetary Council's statement and press conference have circled around the same messages for several months now, with one exception this time. A stability-orientated approach is a must to support growth and achieve the inflation target. The central bank wants a disciplined, restrictive (driven by positive real interest rates) and patient monetary policy. The missing reference is the data-driven approach, although Deputy Governor Virág's explanation was quite clear: the meaning of this is now empty and a much more transparent guidance is needed. And this guidance is all about the pause.

The Monetary Council is of the opinion that the key interest rate of 6.50% is appropriate from the point of view of price stability, financial market stability and growth. This with the emphasis that a further pause in interest rate cuts supports the NBH's stability-orientated approach, and the last part of the forward guidance itself, which mentions geopolitical tensions, volatile financial market developments and risks to the inflation outlook, justifies a further pause in interest rate cuts.

During the Q&A session of the press conference, the issue of the vote was raised again and Mr Virág confirmed that the Council had again voted by a large majority to keep rates on hold. The only dissenting vote was for a cut. In November, Deputy Governor Patai, whose term ends in April 2025, voted for a cut.

All in all, in the current situation we agree with the central bank and see no room for it to ease monetary policy in the short term. In our view, the National Bank of Hungary will leave the interest rate complex unchanged under the current leadership.

Of course, the current situation does not mean that there will be no opportunity to resume the cycle of interest rate cuts in the future. If the European Central Bank accelerates its rate-cutting cycle (probably in the first half of 2025) and the regional central banks also start easing in the second half of the year, the new Monetary Council could take action as early as 2Q25 (probably in June) without endangering the forint as a whole. We think a total of 75bp of rate cuts next year is realistic, which would be roughly in line with the average size of expected easing cycles (between 75bp and 100bp) in the region.

The NBH found a rather muted market reaction to today's meeting. In line with CEE peers, the EUR/HUF moved up very little after the press conference. The HUF market, like its CEE peers, seems to have already switched into Christmas mode, and with little news coming out of today's NBH meeting, it is hard to expect a big market view. EUR/HUF seems to have stabilised around 408-410 for now. At the same time, we see that the entire CEE rates market has switched to paid mode in low year-end liquidity, probably driven purely by CTA flows. While rising rates are positive for CEE peers, in the case of HUF, a sell-off in assets mostly means a weaker HUF. Thus, EUR/HUF may still see some unexpected movement by year-end due to low liquidity, but overall it should stabilise at lower levels after the forint saw some relief in recent days and fell from highs from 415 EUR/HUF.

However, we remain negative on HUF in the medium term. Trump's inauguration in January should bring the global story and CEE's link to the global environment back into focus, which is negative for the region. At the same time, the discussion on NBH rate cuts and economic weakness should be back on the table. As a result, we expect the upward pressure on EUR/HUF to return in the new year, taking the pair closer to the 415–420 range in the first quarter of 2025.

The rates market, like the FX market, has already gone into Christmas mode and especially in the last few days we have seen rather random moves amidst very low liquidity. However, similar to CEE peers, the market is pushing the IRS curve back up. Thus, very short FRAs after the NBH meeting are pricing in two rate cuts of less than 25bp next year and the rest of the curve remains very flat. Although the current Monetary Council seems unwilling to change its hawkish rhetoric, the still looming NBH change and the rather weaker inflation and economy should lead to some repricing down in January and the curve should normalise with some re-steepening.