As expected, the NBH maintained its key interest rate at 6.50% in December. The interest rate corridor remained in place, maintaining a range of +/- 100bp around the base rate. In line with its stability-oriented approach, this decision was largely influenced by elevated inflation expectations and pro-inflationary risks. However, the tone had changed. The NBH began to communicate that decision-making had shifted to a data-driven mode and that market pricing will be taken into account, too.
The December inflation data painted a mixed picture. On the one hand, the headline inflation figure fell within the central bank’s target range, which is positive. However, a closer look at the details reveals that the month-on-month service inflation rate was much higher than expected at 0.8%. Furthermore, underlying structural inflationary issues are being obscured by base effects and the government’s mandatory and voluntary price shield measures. The latest decree states that the price shields will end at the end of February 2026. However, there is a strong chance that they will be extended until the elections.
The Hungarian government is set to introduce an additional utility price cap in January, which will cover the cost of increased household heating consumption during the cold spell. This will provide significant relief for headline inflation, which would have been greatly affected by rising household energy costs.
In addition, on 12 January, NBH Governor Mihály Varga stated that the NBH would prioritise the December inflation data, particularly service inflation, in its upcoming decision. Based on this, a rate cut in January is a wild card and would catch markets somewhat off guard.