Steady rate does not equal steady the forint – Commerzbank

The Hungarian central bank (MNB) is set to leave its base rate unchanged at 6.50%, for the ninth consecutive month, today. That much has been clear from the MPC’s persistent rhetoric, and now confirmed by unanimous expectations among analysts. Governor Mihály Varga has repeated at every opportunity that monetary policy must remain ‘patient and careful’ as the inflation fight is not yet over. Forward guidance is expected to remain intact too, with no rate cuts in sight before year-end, but equally no indication that _hikes_ could be under consideration, Commerzbank’s FX analyst Tatha Ghose notes.

HUF remains vulnerable to being tested

“Headline and core inflation resumed a gradual deceleration over the past couple of months. But, this inflation moderation may now already be slightly outdated: economy minister Marton Nagy has remarked on social media that the war between Israel and Iran could bring back inflationary pressures via energy. In the event that inflation does re-accelerate, the policy rate, while still high in absolute terms, may not deliver a clearly positive real interest rate when measured using month-on-month core trends. That is Hungary’s key vulnerability, in our view.”

“Varga is unlikely to dwell much on this adverse scenario today, especially as recent data allow the central bank to argue that inflation is within the forecast range and that expectations are beginning to moderate. But the FX market will focus on such scenarios. As we have previously noted, what is missing is a convincing signal that MNB would be willing to hike the rate if the forint were to depreciate sharply in a risk-off environment. The forint is a high-beta currency, and global market conditions remain jumpy. S&P’s negative outlook on Hungary, weak Q1 GDP growth, and the IMF’s downbeat 2025 growth forecast (1.4%) all flag up different dimensions vis-à-vis adverse possibilities; what is more, when tensions run high, PM Orban has a propensity to get stuck into the opposite geo-political positions compared with the EU, which also impacts risk perception.”

“A steady base rate is widely anticipated for today, and while this is certainly positive compared to alternatives involving rate cuts, it falls short, in our view, of creating downside protection for the exchange rate. Without a convincing reaction function of the MNB – one that includes the possibility of rate hikes – HUF remains vulnerable to being tested.”