EUR/HUF Exchange Rate: Critical Analysis of NBH Cutting Cycle Restart and Currency Impact – ING Insights

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EUR/HUF Exchange Rate: Critical Analysis of NBH Cutting Cycle Restart and Currency Impact – ING Insights

BUDAPEST, March 2025 – The Hungarian National Bank’s potential restart of its monetary easing cycle presents significant implications for the EUR/HUF exchange rate, according to recent analysis from ING Bank. Financial markets now closely monitor NBH signals as Hungary navigates post-inflation economic normalization. This development follows eighteen months of aggressive rate hikes that stabilized the forint but constrained economic growth. Consequently, currency traders anticipate volatility shifts as policy adjustments materialize.

EUR/HUF Exchange Rate Dynamics and Historical Context

The EUR/HUF currency pair represents one of Central Europe’s most actively traded forex instruments. Historically, the exchange rate demonstrates sensitivity to monetary policy divergences between the European Central Bank and the NBH. Over the past decade, the pair traded within a 350-400 range during stable periods. However, recent inflationary surges pushed the NBH to implement Europe’s highest policy rates at 13%. This aggressive stance temporarily strengthened the forint but created economic headwinds.

Market analysts now observe changing conditions. Eurozone inflation approaches the ECB’s 2% target while Hungarian price growth shows sustained moderation. This convergence creates potential for policy synchronization. Furthermore, Hungary’s current account deficit narrowed significantly in late 2024. These improvements provide the NBH with operational flexibility. The central bank must balance currency stability against growth stimulation needs.

NBH Monetary Policy Evolution and Cutting Cycle Framework

The Hungarian National Bank initiated its current tightening cycle in June 2022. Policy rates increased from 1.60% to 13.00% within eighteen months. This represented the region’s most aggressive monetary response to inflation. The NBH maintained restrictive policy throughout 2024 despite early signs of economic contraction. Governor György Matolcsy repeatedly emphasized inflation control as the primary objective.

Recent communications suggest a strategic pivot. The NBH’s December 2024 statement introduced conditional language regarding future rate decisions. Specifically, policymakers referenced “data-dependent approaches” and “gradual normalization.” These terms typically precede easing cycles. ING analysts identify three potential triggers for cuts:

• Inflation Convergence: Hungarian CPI approaching the 3% ±1% tolerance band
• Growth Concerns: Quarterly GDP contractions exceeding expectations
• External Stability: Sustained forint strength and reserve accumulation

The table below illustrates recent NBH policy decisions:

Currency Impact Analysis and Market Implications

Monetary easing cycles typically exert downward pressure on domestic currencies. However, the EUR/HUF response depends on multiple factors. First, the pace and magnitude of cuts determine market reactions. Gradual reductions of 25-50 basis points per meeting might produce limited forint weakness. Conversely, aggressive cuts could trigger substantial depreciation. Second, forward guidance quality influences outcomes. Clear communication about the cycle’s endpoint helps anchor expectations.

Third, external factors remain crucial. The ECB’s own policy trajectory creates relative dynamics. Currently, the Eurozone maintains higher rates than pre-2022 levels. This differential provides some protection for the forint. Additionally, regional risk sentiment affects all Central European currencies simultaneously. Finally, technical factors like positioning and liquidity conditions amplify moves during policy transitions.

ING’s Analytical Perspective and Forecast Scenarios

ING Bank’s research division published detailed analysis in February 2025. Their economists identify two probable scenarios for the EUR/HUF pair. The baseline scenario assumes a measured cutting cycle beginning in Q2 2025. This approach would involve 25 basis point reductions at alternating meetings. Consequently, the policy rate reaches 10.00% by year-end. Under these conditions, ING projects EUR/HUF trading between 385 and 400.

The alternative scenario involves delayed easing. Persistent services inflation or geopolitical tensions might postpone cuts until Q3 2025. This delay would maintain higher carry trade attractiveness. Therefore, the forint could appreciate toward 375 against the euro initially. However, subsequent cuts would then generate more pronounced weakness. ING emphasizes that both scenarios assume no major external shocks.

Historical comparisons provide additional context. Previous NBH easing cycles in 2016 and 2020 produced different outcomes. The 2016 cycle coincided with global risk-on sentiment, limiting forint depreciation. Conversely, the 2020 pandemic-era cuts occurred during market stress, amplifying currency weakness. Current conditions resemble 2016 more than 2020, suggesting contained impact.

Economic Background and Structural Considerations

Hungary’s economy displays unique characteristics influencing monetary policy effectiveness. The country maintains high foreign currency debt levels, particularly in Swiss francs and euros. This structure creates exchange rate sensitivity for both households and corporations. Additionally, Hungary operates within the European Union but outside the Eurozone. This position allows independent policy but requires careful currency management.

Several structural factors support forint stability despite easing prospects. First, foreign direct investment continues flowing into automotive and battery manufacturing sectors. Second, EU fund disbursements resumed following rule-of-law concerns resolution. Third, tourism revenue reached record levels in 2024. These inflows provide fundamental support. Moreover, the NBH maintains substantial foreign exchange reserves exceeding €40 billion.

Inflation dynamics warrant particular attention. Hungarian CPI peaked at 25.7% in January 2023 before declining steadily. The rate reached 5.2% by December 2024, approaching the upper tolerance band. Core inflation metrics show slower improvement, especially in services. This stickiness might constrain the cutting cycle’s pace. Additionally, wage growth remains elevated around 12-14% annually, creating potential second-round effects.

Conclusion

The EUR/HUF exchange rate faces a pivotal period as the NBH contemplates restarting its cutting cycle. Monetary policy normalization represents a delicate balancing act for Hungarian authorities. Market reactions will depend on implementation pace, communication clarity, and external conditions. ING’s analysis provides valuable frameworks for understanding potential outcomes. Ultimately, Hungary’s strong fundamentals and EU integration should contain excessive volatility. Nevertheless, traders must prepare for increased EUR/HUF fluctuations during this policy transition.

FAQs

Q1: What triggers the NBH to restart its cutting cycle?
The NBH typically considers cutting rates when inflation approaches its target band, economic growth shows significant slowing, and currency stability appears sustainable. Recent data shows Hungarian CPI falling toward 5%, creating conditions for potential easing.

Q2: How does the EUR/HUF exchange rate typically react to NBH rate cuts?
Historical patterns show the forint generally weakens against the euro during easing cycles, but the magnitude depends on cut size, pace, and global market conditions. Gradual cuts often produce limited depreciation if well-communicated.

Q3: What differentiates Hungary’s current situation from previous cutting cycles?
Current conditions feature higher initial interest rates, better EU fund access, stronger FDI inflows, and more anchored inflation expectations than previous cycles. These factors may support the forint despite policy easing.

Q4: How does ECB policy affect the EUR/HUF exchange rate during NBH easing?
The ECB’s own policy trajectory creates relative interest rate differentials. If the ECB cuts rates simultaneously or before the NBH, the forint might experience less pressure. Divergent policies typically amplify exchange rate moves.

Q5: What risks could alter the projected EUR/HUF trajectory?
Geopolitical tensions, unexpected inflation rebounds, sudden risk-off sentiment in global markets, or faster-than-expected ECB easing could all significantly impact the EUR/HUF exchange rate beyond current projections.

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