Hungary cuts key rate by 100 bps to 17%, launching Europe's first easing cycle

Hungary's central bank cut its key one-day deposit rate by 100 basis points to 17% on Tuesday and flagged further possible "gradual" cuts as inflation slows, delivering the start of the first such policy easing cycle in Europe.

The National Bank of Hungary launched the 18% emergency one-day deposit rate, the highest in the European Union, in October to shore up the falling forint amid a surge in inflation. The rate cut is effective as of Wednesday.

Governor Gyorgy Matolcsy said an improvement in the current account balance, a slowing of inflation and the forint's gains this year all contributed to Tuesday's start of policy normalisation.

"Even after today's decision, inflation remains the public enemy," Matolcsy told a briefing, adding that reducing the 13% base rate would not be on the agenda for quite some time.

The NBH is aiming to bring down inflation, which at an annual rate 24% is still the highest in the European Union.

"Looking ahead, financial market stability is also key to achieving price stability. In the current environment, a cautious and gradual approach is warranted," the bank said in a statement.

"If the improvement in risk perceptions persists, the Bank will continue the gradual convergence of the interest rate conditions of one-day tenders to the base rate."

Central Europe's other central banks -- which have benchmark rates way below the Hungarian rates and lower inflation rates -- have so far held their interest rates steady, after sharp hikes launched since June 2021.

Hungary's central bank has previously faced pressure from Prime Minister Viktor Orban's government to cut the cost of credit because of the adverse impact it is having on a fragile economy which is stagnating this year.

Out of 11 economists, who gave a forecast in a Reuters poll last week, seven projected a 100 bps cut in the one-day rate NBHK3 to 17%, two analysts pencilled in a 50 bps reduction, while two expected no change, eyeing the first move only next month.

At 1405 GMT, the forint EURHUF=D3 traded at 375.45 versus the euro, firming from 377.15 before the rate announcement. The currency, which sank to record lows last October, is some 6% stronger for the year, outperforming its regional peers.

The survey median projects the NBH to proceed with 100 bps of cuts over the coming months, aligning its one-day rate with the 13% base rate by the autumn, with four out of eight economists expecting the move to take place in September.

Reuters