Press release on the Monetary Council meeting of 27 May 2025

27 May 2025

At its meeting on 27 May 2025, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 28 May 2025:

The primary objective of the Magyar Nemzeti Bank (MNB) is to achieve and maintain price stability. Without prejudice to its primary objective, the Magyar Nemzeti Bank preserves financial stability and supports the Government’s economic policy, as well as its policy on environmental sustainability.

Rapidly changing trade policy plans have increased global economic uncertainty. As the first trade agreements are more favourable than expected by market analyses, the risk of recession in the United States has decreased. In the European Union, the announced programmes for expenditure hikes could stimulate growth in the upcoming years, dampening the restraining effects of slowing international trade.

Higher tariffs are increasing inflation expectations in the United States, while in Europe the impact on prices is expected to be more muted for the time being. Looking ahead, the upward effect of tariffs on inflation expectations, elevated global food prices, as well as continued high price dynamics in market services pose upside risks to inflation. Lower energy and commodity prices are decreasing global inflation in the short term.

Global investor sentiment improved. Major stock market indices increased and long-term yields in the United States and in Europe rose due to the significant government borrowing. The Federal Reserve left the target range for the federal funds rate unchanged in May, while the interest rate path expected from the central bank shifted upward. Market expectations for the European Central Bank’s key interest rate have also moved up. In the CEE region, the Czech central bank lowered the policy rate by 25 basis points and the Polish central bank by 50 basis points, while the Romanian central bank left the key interest rate unchanged.

In Q1, Hungarian economy stagnated compared to a year earlier. Industry and construction restrained economic performance, which was lower than expected, while services had a positive effect. In March, domestic retail trade increased slightly. Consumer confidence remained subdued. The number of employees is high by historical standards, while labour market tightness has eased further. Wage dynamics have generally slowed down in the beginning of 2025.

Domestic consumption is expected to grow further in 2025, alongside rising real wages. Economic growth is expected to pick up in a more balanced structure over the forecast horizon as the large capacity-enhancing industrial investment projects start production. However, global rises in tariffs could lead to subdued export performance, and rising uncertainty could result in the postponement of certain investment projects, both of which could act as a drag on domestic economic activity.

The domestic credit market continues to have a dual nature: household lending picked up further in March, while corporate credit demand remained low. The annual growth rate of household loans may continue to increase in 2025. The growth rate of corporate lending is expected to rise from 2025 H2. The capitalisation of Hungarian banks is strong, and their liquidity level remains abundant despite expiring central bank programmes.

In April 2025, inflation fell to 4.2 percent and core inflation to 5.0 percent. A wide range of products contributed to the decline in the annualised consumer price index. The extent of repricings in April was above the historical average in the case of tradables and market services. In the case of food, repricing fell short of the historical average, partly due to the official restriction on profit margins introduced in mid-March. Price expectations of both households and firms have decreased, although they have remained at high levels. Moderating expectations is key to achieving the inflation target.

The inflation rate is expected to remain near the upper bound of the central bank tolerance band in the coming months. Lower world oil prices have fed through to domestic fuel prices. Profit margin caps introduced by the authorities in the case of food and extended to a number of household goods, as well as the voluntary pricing commitments by telecom service providers and banks, are also expected to moderate inflation. However, the strong price dynamics in market services point to higher inflation throughout the year.

Tariff announcements have led to risks to inflation with different timings and opposite directions in the domestic economy. Lower global commodity prices point to decreasing inflation in the short term. However, permanent increases in tariff rates and the effect of uncertainty in international markets on risk aversion towards Hungarian assets could intensify upside risks to inflation in the medium term.

The current account balance showed an outstanding surplus of EUR 1050 million in March. With an upswing in domestic demand, the current account surplus is expected to temporarily decline slightly in 2025; however, the external position is expected to remain in a persistently large surplus in the coming years.

In the MNB’s projection, the fiscal deficit may decrease further in 2025 and 2026 from 4.9 percent in 2024. Following the 0.1 percent surplus in 2024, the primary balance excluding interest expenditures is likely to be at near-equilibrium levels over the entire forecast horizon. The debt ratio is expected to fall in the coming years, even with the revised deficit targets.

In the current macroeconomic environment, the Bank can make the most effective contribution to the easing of economic agents’ increased precaution and to sustainable economic growth by achieving price stability and maintaining financial market stability. Restrictive monetary policy contributes to the maintenance of financial market stability, the anchoring of inflation expectations consistently with the central bank target and, as a result, to the achievement of the inflation target in a sustainable manner by ensuring positive real interest rates.

In line with the stability-oriented approach, the Monetary Council left the base rate unchanged at 6.50 percent at today’s meeting. The O/N deposit rate and the O/N lending rate also remained unchanged, at 5.50 percent and 7.50 percent, respectively.

The Monetary Council is committed to the achievement of the inflation target in a sustainable manner. A careful and patient approach to monetary policy remains necessary due to risks to the inflation environment as well as trade policy and geopolitical tensions. In the Council’s assessment, maintaining tight monetary conditions is warranted.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 June 2025.

MAGYAR NEMZETI BANK
Monetary Council

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