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The volatile risk environment will continue to demand a cautious and patient approach to interest rate policy, stated the Vice President of the Hungarian National Bank (MNB), during an online discussion following the Monetary Council’s interest rate decision.
Barnabás Virág highlighted that monetary policy entered a new phase in April, characterized by a slower pace and a data-driven approach to further cuts in the base rate. Emphasizing the importance of patience, he stressed, “there is no hurry.”
In the recent meeting, the MNB’s Monetary Council reduced the central bank’s base rate by 50 basis points to 7.75 percent and lowered the two edges of the interest rate corridor by the same amount.
This decision follows previous cuts of 75 basis points in March, 100 basis points in February, and 75 basis points in January.
Mr. Virág explained that the Hungarian economy is currently experiencing significant and widespread disinflation, with market services inflation gradually decreasing from elevated levels. He justified the slower pace of base rate cuts due to the inflation outlook and increasing market risk aversion, emphasizing the importance of maintaining financial market stability.
While expecting a temporary uptick in the pace of price increases mid-year, the MNB Vice President pointed out that inflation has reached a low level globally, and the pace of disinflation has slowed. In Hungary, consumer prices rose by 3.6 percent year-on-year in March, falling within the central bank’s tolerance band since the beginning of the year.
He also highlighted the double-digit wage growth in the labor market and the expected significant real wage growth throughout the year, driven by this wage dynamic and an anticipated average annual inflation of four to five percent.
Regarding economic forecasts, Mr. Virág mentioned that export performance is hindered by the prolonged weakness in the European economy, while significant capacity expansion from foreign direct investment is gradually increasing.
The central bank forecasts a GDP expansion of 2.0-3.0 percent in 2024, with balanced domestic growth expected from 2025 onwards and a rise in the country’s export market share.
In determining interest rate policy, he stressed the importance of closely monitoring four factors: inflation, the country’s risk perception, the international monetary policy environment, and financial market stability. He also highlighted the need to monitor geopolitical tensions in the Middle East and their potential inflation risks.
Responding to questions, Mr. Virág confirmed the realistic target of achieving a 6.5-7 percent base rate by end-June. He mentioned that during the current meeting, the council unanimously supported one decision option – a 50 basis point cut.
Regarding expected interventions in fuel prices, Virág noted that their analysis indicated higher margins following the removal of the price cap, surpassing not only previous margins but also the regional average. He called for justifying these interventions to achieve a lasting and sustainable reduction in margins.
Via MTI; Featured Image: Wikipedia