Euro ambitions overshadow an uneventful MNB rate decision
The National Bank of Hungary left its base rate unchanged at 5.50% for a second consecutive meeting, matching unanimous expectations among analysts.
We see the release as marginally negative for NOK, though insufficient to materially However, attention has shifted to the government's ambitious fiscal consolidation plans and renewed commitment to adopting the euro. Prime Minister Peter Magyar has outlined a path to reduce the budget deficit below 3% of GDP by 2030, while reiterating his intention to join the euro area as soon as possible. We see these developments as far more important for the forint than today's monetary policy decision, as improved fiscal credibility could lower borrowing costs without undermining currency strength.
The government's first full-year budget targets a reduction in the deficit from an estimated 7.5% of GDP this year to 4.9% in 2027, followed by 4.0% in 2028, 3.4% in 2029 and 2.8% by 2030.
This represents an ambitious adjustment, supported by spending reductions, tax reform, and the reversal of prior government commitments. That said, implementation is likely to prove challenging, particularly with public debt projected to decline only marginally from 77.5% to 77.2% of GDP next year, still well above the Maastricht reference value of 60%. The prospect of more than €16bn in previously frozen EU funding should provide additional support, although much will depend on the government's ability to deliver its commitments.
For the MNB, these developments reinforce the case for patience. September headline inflation stood at just 1.6% YoY, with core inflation at 1.9%, providing considerable room for monetary easing.
Nevertheless, the Bank's decision to lower its inflation target to 2.5% from 2028, alongside its projection for inflation to rebound to 3.1% next year, argues against premature cuts. We thus continue to favour rates remaining unchanged through year-end.
For the forint, the more important development is a potential shift in the underlying drivers of appreciation.
While elevated interest rates have traditionally underpinned HUF strength, improving fiscal credibility, renewed EU funding and the prospect of euro adoption will increasingly take over that role. This may allow Hungarian yields to decline somewhat without necessarily weakening the currency, as falling risk premia offset narrowing interest-rate differentials. Admittedly, with HUF already up almost 6% against the euro this year, investor positioning increasingly extended and the budget receiving a muted market response, further gains will require tangible progress.Still, we remain constructive on HUF, provided the government delivers on its ambitious fiscal commitments, with elevated energy prices and renewed global risk aversion remaining the principal downside risks.
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