Hungary's National Bank May Hold Rates as Geopolitical Pressures Rise

Despite expectations of further rate cuts in Hungary, analysts at ING Think are warning that the National Bank of Hungary (NBH) may keep interest rates steady at 5.50% due to ongoing geopolitical pressures and a rise in inflation.

The NBH has committed to delivering three previous interest rate cuts, which were met with expectations. However, Governor Mihály Varga stated that the next key moment for monetary policy would be the September Inflation Report and its updated staff projections.

ING Think expects the inflation path to be revised upward over the monetary policy horizon based on the expected effects of higher energy prices and imported inflation. The bank's room for manoeuvre will also be limited due to ongoing geopolitical pressure.

The European Central Bank (ECB) raised rates by 25bp in September, narrowing the interest rate differential with Hungary. ING Think expects the NBH's review of the optimal inflation target to ultimately support lowering the current 3% target to 2%, implemented in two stages over the coming years.

Although analysts at ING Think still forecast further cuts before the end of the year, they believe that a terminal rate of 5.00% by the end of the year would provide a sufficient risk premium and maintain a positive real interest rate, helping preserve market stability.