Hungary central bank seen keeping its guard up as inflation risks mount: Reuters poll

Hungary central bank seen keeping its guard up as inflation risks mount: Reuters poll

By Krisztina Than

BUDAPEST (Reuters) – Hungarys central bank is expected to leave its base rate unchanged at 13% next Tuesday, the highest in the European Union, due to persistent inflation pressures which are only expected to ease substantially in the second half of 2023.

All 12 economists polled in a Jan. 16-20 survey said the National Bank of Hungary (NBH), which launched a new quick deposit tool at an 18% interest rate in October to shore up the forint, would leave its base rate unchanged next week. The bank will adopt a wait-and-see attitude even though the forint has posted significant gains since the start of the year, analysts said.

The forint, which underperformed its regional peers in 2022, firmed to 395.50 by Friday, up from levels of around 420 in mid-December and around 400 at end-2022.

“We believe if EURHUF firms around 390 levels, the NBH may start narrowing the gap between the 18% effective rate and the 13% policy rate already in Q1, but policy rate cuts are unlikely to be an option before September, considering the risks of persistent inflation pressures,” Citigroup analyst Eszter Gargyan said in a note.

Economists polled by Reuters see 2023 average inflation at18.5%, after average inflation last year rose to 14.5%, the highest in 25 years. Even though the forints gains could ease inflation pressures, robustly growing wages and strong repricing by companies continues to pose upside risks.

“The darkest days of forint might be over, (but) the valuation of the currency remains exceptionally fragile in our view,” said Peter Virovacz at ING, adding that the inflation peak was still ahead.

Inflationary pressures were compounded in December after Prime Minister Viktor Orban, under pressure from a supply shortage, scrapped a year-long cap on retail fuel prices and increased the excise tax which led to retail prices soaring.

While annual inflation picked up to 24.5% in December and could rise further in January, the economy is expected to stagnate this year, according to the poll.

Economists see average inflation running at 5.1% in 2024, which would mean the NBH missing its 2% to 4% policy targetrange for the fourth year in a row.