Hungary's central bank says financial stability is needed to curb inflation – markets

BUDAPEST: Financial market stability is crucial to bring inflation back to the medium-term target due to the stronger influence of exchange rates on consumer prices, Hungary's central bank said in minutes of its March 26 monetary policy meeting published on Wednesday.

The bank cut its key interest rate by 75 basis points to 8.25% last month as expected, slowing the pace of rate cuts after the forint fell to a one-year low, partly due to an escalating standoff between the bank and the government.

Although tensions have eased in recent weeks, the forint is still down around 2% against the euro this year, while the Polish zloty has gained by the same amount, supported by renewed inflows from the European Union and the prospect of stable interest rates in 2024.

The Hungarian central bank expects the budget gap to be 5.2% of GDP in 2023, above target

“As the impact of exchange rate changes on consumer prices had become stronger, it was in the interest of the Hungarian economy to maintain a stable, predictable financial market environment,” the Hungarian central bank said.

Rate setters said the structure of Hungarian inflation had changed, reflected in higher service price increases than before.

Despite the recent sharp decline in overall inflation in Central Europe, the service sector inflation rate, according to the latest data, was well above the level of the last decade, ranging from 10.4% in Hungary to 7.3% in Poland, according to a Raiffeisen Bank balance sheet.

“Against this background, members emphasized that subdued imported inflation was crucial for achieving the inflation target, for which maintaining stability in financial markets was crucial,” the Hungarian central bank said.

The next monetary policy meeting will take place on April 23rd. Then the bank said it would likely slow the pace of rate cuts further, having cut a total of 975 basis points since last May.

Poland's central bank welcomed gains in the zloty, Central Europe's best-performing currency this year, and said the stronger exchange rate could help curb inflation.