Hungarian central bank expected to leave rates steady next week, may ease in 2021

BUDAPEST: The National Bank of Hungary (NBH) is likely to leave interest rates unchanged next Tuesday, but recent declines in inflation may allow it to ease policy early next year if a row over the European Union's next budget is resolved soon.

After weeks of haggling, EU leaders appeared to be moving towards a compromise over the bloc's next budget and a COVID-19 recovery fund worth 1.8 trillion euros.

The fund has been blocked by Poland and Hungary over provisions linked to democratic standards.

In a Dec. 7-9 survey, 21 out of 23 economists said the NBH would leave its base rate unchanged at 0.6pc.

"As we expect a quick agreement in the budget/RRF (rule-of-law framework) dispute, this will calm the markets and the NBH will be able to focus on inflation developments," said economist Peter Virovacz at ING.

"With inflation dropping below 3pc (close to 2pc) early next year, this could translate in a change in the one-week depo facility. A cut to 0.6pc could be in the cards."

Earlier on Wednesday, Hungary more than doubled its budget deficit target for 2021 because of a slower-than-expected economic recovery from the coronavirus pandemic, which has caused a surge in public spending.

Economists expect the Hungarian central bank to leave its one-week deposit rate unchanged at 0.75pc this month after a 15-basis-point hike in September amid a rise in inflation and higher risk aversion caused by the second wave of coronavirus.

However, some analysts say the bank could reverse the September increase by the end of the first quarter if market conditions remain favourable and inflation declines.

"We think that if inflation remains benign, as our projections foresee, and if the forint remains relatively stable, over time this would raise the possibility that the (NBH) will reverse its 15bp rate hike in the one-week deposit rate," economists at Goldman Sachs said in a note.