Hungary's central bank cuts rate for third time, signals more easing possible

Hungary's central bank delivered its third consecutive quarter-point rate cut on Tuesday, lowering the base rate to 5.5% as expected. The Monetary Council signaled that further easing remains possible, contingent on fresh inflation projections and global market conditions.

The decision matched the unanimous forecast of 13 economists surveyed earlier this month. The survey projected an additional 50 basis points of cuts by end-2026, bringing the rate to 5%.

Inflation in Hungary has fallen sharply from the European Union's highest levels following Russia's 2022 invasion of Ukraine. July's annual inflation rate stood at 1.2%, the lowest in nearly a decade and well below the central bank's 3% target.

The Council said price growth would stay below target for the rest of this year and throughout next year, before returning to the target in the first half of 2028. It noted that July's inflation reading came in below expectations.

Governor Mihaly Varga said policymakers would also monitor potential rate moves by global central banks when setting policy.

The forint strengthened after the announcement, trading at 361.3 per euro, up from 362.50 just before the decision. Gains in the currency since Prime Minister Peter Magyar took office in May have supported the easing cycle.

Capital Economics analyst William Jackson said further cuts were likely, with an additional 75 basis points of reductions penciled in, taking the policy rate to 4.75% by year-end.

The bank said its risk assessment would be shaped by market expectations on the fiscal path, euro adoption prospects, and the external environment.

On Monday, the government said this year's budget deficit would widen sharply to 7.5% of economic output, potentially the EU's highest and a full percentage point above the central bank's June forecast.

Finance Minister Andras Karman reaffirmed the government's commitment to meeting euro adoption criteria by 2030, including a deficit below 3% of output. He said this year's higher shortfall did not change that commitment.

Varga said fiscal commitments were an important signal to investors and the central bank, adding that the government's euro adoption pledge should become increasingly clear.