No scope for Hungary rate cuts amid inflation rebound, rate-setter warns

By Gergely Szakacs

BUDAPEST, Feb 6 (Reuters) - Hungary's average inflation rate could rise to 4.1% to 4.2% this year, with possible U.S. tariffs on European imports posing upside risks, outgoing rate-setter Gyula Pleschinger told Reuters, adding he saw no opportunity for interest rate cuts this year.

Hungary's central bank left its base rate steady at 6.5% last week, the joint highest in the European Union, and said tight monetary conditions were needed due to the risk of higher inflation and volatility in emerging markets.

It marked the fourth month of unchanged rates after easing by a combined 11.5 percentage points, aided by a retreat in inflation from the EU's highest levels of more than 25% two years ago.

However, the bank has warned of a rebound in prices amid falls in the forint, tax hikes and higher fuel and food prices. Pleschinger said Hungarian inflation could rebound to 4.1% to 4.2% on average in 2025 from last year's 3.7%.

"January inflation can rise above 5%, which will be followed by a gradual decline, but inflation can fall back into our tolerance range (2% to 4%) only sometime around the end of the year," he said. Analysts see January inflation at 4.8%.

That would mean price growth exceeding the bank's target range for the better part of this year, with energy and commodity prices, high inflation expectations and possible U.S. tariffs on EU imports all posing risks.

"I do not see an opportunity for the Monetary Council to lower interest rates this year," said Pleschinger, who has served 12 years on the rate-setting panel and was a key contact for investors and rating agencies at the bank.

His outlook is at the hawkish end of analyst forecasts for Hungary's base rate. While some economists expect no reductions, the median forecast projects 75 basis points of cuts by the end of 2025, taking the rate to 5.75%.

"I think it would be definitely prudent if the Council approached any rate reduction in a very cautious and considered manner," said Pleschinger, who will last vote at the Feb. 25 meeting. "A premature step would damage credibility."

Pleschinger said caution was also justified as Poland's central bank, which left its main rate steady on Wednesday, has ruled out easing for the near future despite Poland's much stronger credit rating and risk assessment.

The higher inflation risk comes amid market concerns that a leadership change in March could lead to premature rate cuts to stimulate the economy ahead of a 2026 election.

Prime Minister Viktor Orban, in power since 2010, nominated then Finance Minister Mihaly Varga in November as Hungary's next central bank governor, turning to an ally as he seeks to shore up the economy after two years of near-stagnation.

Varga has sought to allay worries that the bank might bow to government pressure for rate cuts amid a weak recovery. He will chair his first rate-setting meeting on March 25, when the bank is scheduled to issue a quarterly forecast update.

Pleschinger said Varga's lieutenants, including Finance Ministry State Secretary Peter Beno Banai and former government debt agency AKK leader Zoltan Kurali, represented what he called strong guarantees for professional management at the bank.