NBH Expected to Hold Rates as Inflation, Deficit Mount

The National Bank of Hungary (NBH) is widely expected to keep its key interest rate unchanged at its upcoming Tuesday meeting, despite a dovish signal from the central bank in December.

Fresh economic data reveals rising services inflation and a widening fiscal deficit, building a strong case for a cautious policy stance this week.

Sticky Inflation Complicates Rate Cut Timeline

A key factor working against a rate cut is the latest inflation report. Services inflation accelerated in December, climbing to 6.8% year-over-year from 6.5% in November.

This metric is particularly significant, as NBH Governor Varga previously identified it as a critical data point that the central bank would be monitoring closely.

Widening Fiscal Deficit Adds to Policy Pressure

Adding to the NBH's challenges are Hungary's recent fiscal figures. The national deficit for December expanded to 6.5% of GDP in cash terms, overshooting the government's 5% target. This fiscal pressure further complicates any immediate move toward monetary easing.

Market Outlook and Forward Guidance

According to forecasts from both UBS and Bloomberg, the NBH will likely hold its policy steady for now. UBS analysts anticipate that the central bank will maintain its forward guidance, signaling the potential for rate cuts in February or March.

Beyond the rate decision, market participants are focused on two key events later in the week:

• Friday's fourth-quarter GDP release, with consensus estimates pointing to 0.8% year-over-year growth.

• The publication of the NBH chartbook, which was delayed from the previous week.