The National Bank of Hungary (Magyar Nemzeti Bank) reduced its base rate by 75bp to 10.75% at its December rate-setting meeting. Today's reduction of the base interest rate was already the third in 2023. The scale of the reduction was the same as at the previous rate-setting meeting in November.

The Hungarian central bank has once again lowered interest rates. Photo by 3844328/Pixabay

In an effort to combat high inflation, the Hungarian central bank raised interest rates to 13% between 2021 and 2022. Subsequently, for eleven consecutive sessions, it maintained the main interest rate unchanged. By the end of September, the main interest rate stood at 13%, reaching its highest level since February 2000. In October, Magyar Nemzeti Bank initiated a series of cuts, reducing the benchmark three-month deposit rate by 0.75 percentage points. The scale of the reduction was the same at the rate-setting meeting in November. Even after today's further reduction of 0.75 percentage points to 10.75%, the base interest rate in Hungary remains the highest among all European Union countries.

For weeks, Hungarian Prime Minister Viktor Orbán's administration has been urging for a decisive monetary policy easing to stimulate the Hungarian economy, which analysts predict will contract by 0.6% in 2023 before experiencing 2.8% growth in 2024.

However, György Matolcsy, the President of the National Bank of Hungary, argues that although inflation along the Danube has significantly decreased in recent months (from nearly 26% to just under 8%), it is still too high for the central bank to afford radical interest rate cuts. Despite government pressure the central bank has maintainted a "cautious stance". "The council is constantly assessing incoming macroeconomic data, the outlook for inflation, and developments in the risk environment. In the coming months, decisions on any further reductions in the base rate and their optimal pace will be made on the basis of this information, in a data-driven manner," the policymakers said in a statement released after the meeting, citing risks surrounding global disinflation and volatility in international investor sentiment 

The Hungarian central bank's projections indicate that the average annual inflation is expected to range between 17.6% and 17.7% in 2023, followed by a decrease to 4% to 5.5% in 2024, and a further moderation to 2.5% to 3.5% in 2025.

Central banks in Central Europe, notably in Poland and Hungary, have undertaken assertive measures to significantly reduce borrowing costs over the past few months.

The Monetary Policy Council (RPP) in Poland lowered the main interest rate by as much as 75 basis points in September, and in October, it further reduced it by 25 basis points to 5.75% (the lowest level in Central Europe). However, in November and December, RPP members opted against further cuts.

Financial analysts and investors anticipate that on December 21, the Czech National Bank (Česká národní banka, ČNB) will reduce the benchmark interest rate by 25 basis points (currently standing at 7%). In the case of Slovakia, which has been in the eurozone since January 1, 2009, monetary policy is determined by the European Central Bank.

(J)