Will Hungary's central bank hold its base rate on Sep 22?

After three straight rate cuts, Hungary's central bank is expected to hold the existing rate this Tuesday. Kalshi's contract on the decision prices "Maintain current rate" at 94 cents, and we agree with that view. At that price, a hold pays 6.38% in one day, making this one of the fastest, highest-return, and, perhaps, lowest-risk trades on prediction markets.

Hungary’s central bank has been cutting rates since June, but the conditions that justified those cuts have changed, and the bank is now signaling a different priority. The bank said in July it would keep cutting "throughout the summer," with any further moves to be decided "based on the September Inflation Report." In the August statement, it maintained the same wording about awaiting September’s data.

The September data on September 8 revealed that August inflation ran at 1.3%, far below the 3% target. A good reason for a fourth cut, right? Unfortunately, no. Food prices were down 1.4% over the year, and household energy was down 4.3%, and those two hold the headline near 1%. Services rose 5.0%, up from 4.7% in July, and core inflation ticked up to 2.0% from 1.9%. With the base rate at 5.50%, the disinflation the summer cuts were priced on has stopped.

On top of that, Bloomberg reported on September 3, citing a person familiar with the plan, that the bank means to hold at 5.5% and cut its inflation target to 2.5% from 3%. The low 1.3% inflation print gives the bank cover to make this move. 

With this in mind, Tatha Ghose, Commerzbank's senior emerging markets economist, called it a "convenient window to lower the target". When inflation is already below the old target, announcing a tougher new target looks quite achievable. But lowering the inflation target is itself a tightening move, so pairing it with a rate cut would send mixed signals about whether the bank is easing or tightening.

Hungary's currency gives the bank another reason to pause. The Hungarian forint has weakened against the euro, with one euro buying 349.53 forints on June 16 and 364.28 on September 18. That is a 4.2% rise in the price of a euro, wiping out the forint's post-election gains.

Both the July and August statements pointed to exchange rate stability as key to keeping inflation in check, and the government backs that view. Péter Magyar, the Tisza party prime minister elected in April, said Governor Mihály Varga's bank can operate without interference as long as it ensures exchange rate stability and does not block government policy.

A hold with a lower inflation target achieves two goals at once. First, it stops the easing cycle that no longer fits the data. Second, it resets the bank's medium-term goal without spooking the currency.