WOOD Flash – Hungary macro: MNB turns cautious, with a slower pace of rate cuts

Yesterday (26 March), the Monetary Council reduced the base rate by 75bps, to 8.25%, accompanied by a symmetric drop in the O/N deposit and lending rates, to 7.25% and 9.25%, respectively. While the decision was in line with our expectations, the forward guidance provided by Deputy Governor Virag, during the press briefing, was mildly hawkish. Inflation has slowed down significantly, and the economic recovery remains weak, which should, in theory, provide ample room for monetary easing in the months ahead. However, these developments are unfolding against an adverse backdrop of deteriorating domestic policies and worsening relations with the EU, which justify a rising risk premium, which could limit the room for easing. We maintain our view of the policy rate dropping to 5.50% by the year-end, but highlight that the scope could be reduced by 50-100bps.