Hungary holds rates at 6.5%, no clarity on rate cut timing

By Gergely Szakacs

BUDAPEST, Jan 27 (Reuters) - Hungary's central bank left its base rate steady at the European Union's joint-highest level of 6.5% on Tuesday, as expected, and gave no clues as to when it will make its first cut since late-2024 amid an uncertain inflation outlook.

A key factor of uncertainty for 2026 is the outcome of a national election on April 12, where right-wing Prime Minister Viktor Orban will fight to extend his 16-year grip on power against a surging centre-right challenger.

Hungary's inflation, which scaled the EU's highest levels of more than 25% in 2023, fell to a 15-month low of 3.3% in December, and while closing in on the central bank's 3% target, the annual reading came in above its monthly estimate.

Governor Mihaly Varga said January inflation figures to be released next month would be key in shaping policymakers' view of underlying price pressures, which ran stronger than the bank expected in unprocessed food, manufactured goods and services.

"Information on repricing patterns at the start of the year will be critical," Varga told a news conference, adding that inflation could dip below 3% at the start of the year.

"We need to stay cautious, as the development of household expectations is key regarding medium-term inflation trends," he said, adding that currency market stability was needed.

At 1431 GMT, the forint EURHUF= traded at a two-year-high of 380.35 versus the euro, extending last year's gains fuelled by the central bank's tight monetary policy.

DECEMBER PRICE STRUCTURE A 'BAD OMEN'

The bank has two rate meetings left before an April 12 election, with Orban's fiscal giveaways to shore up his poll standing, boosting Hungary's budget deficit and raising inflation risks, analysts have said.

While the forint EURHUF= has gained some 6% to the euro last year, the bank's last rate cut in September 2024 weakened the currency.

"The unfavourable structure of December (inflation) data is a bad omen with regard to repricing at the start of the year," Erste Bank economist Janos Nagy said. He said the chances of a rate cut next month have declined in light of Varga's remarks.

Analysts now see room for 75 basis points worth of rate easing by the end of 2026, 25 bps more than expected last month amid a slightly more benign inflation outlook over the next two years compared with their December projections.