Exclusive-Hungary rate cut still possible this year if euro plan gains traction, deputy governor says

By Krisztina Than and Gergely Szakacs

BUDAPEST, Sept 25 (Reuters) - Hungary's central bank could still deliver a rate cut by the end of this year if external market conditions are favourable and the government presents a credible deficit-cutting plan to join the euro, a top central banker said.

The National Bank of Hungary left its base rate steady at 5.5% on Tuesday, pausing a series of interest-rate cuts, and lowered its inflation target to 2.5% from 3% as part of the country's efforts to adopt the single European currency.

Zoltan Kurali, deputy governor in charge of monetary policy, told Reuters that a pledge by Prime Minister Peter Magyar's cabinet to meet the terms of euro entry by 2030 implied Hungary could join the Exchange Rate Mechanism (ERM-2), the waiting room of the euro, in early 2029 "at the latest."

"The earliest date to adopt the euro could be January 1, 2032, if Hungary meets the Maastricht criteria by 2030," he said in an interview late on Thursday.

Kurali said energy market developments, the 2027 budget and a medium-term fiscal plan Magyar's government aims to unveil next month would be key factors for policy makers to determine whether any additional interest-rate cut is possible this year.

The central bank has lowered rates four times this year as inflation has remained well below target. While price growth has recently ticked up, to 1.3% in August from 1.2% in July, economists broadly expect the bank to deliver one more rate cut this year.

"If the data warrant it and the move is well-founded, then the possibility of rate easing is of course open," Kurali said, when asked about the median forecast in a September Reuters survey projecting another 25-basis-point rate cut by the end of 2026.

"If there is clarity on the fiscal side and the process of euro adoption is launched, then this will become a certainty and that will lead to a different, more favourable risk environment than the current one, where euro entry is still only a pledge."

Kurali warned, however, that caution was needed amid high volatility in core market yields and global energy prices.

ASSET RALLY

Magyar, who ousted right-wing leader Viktor Orban after 16 years in April, has put euro adoption back on the agenda, triggering a rally in Hungarian assets, with foreign investors pouring over $13 billion into the local bond market year-to-date, according to Deutsche Bank.

Kurali declined to comment on questions about the exchange rate level where Hungary should join ERM-2, saying the bank's main task now was to accommodate the economy to its 2.5% inflation target, which should anchor wage and price setting behaviour.

He said any decision to further lower the target if needed to meet euro entry conditions would be made only after Hungary has joined ERM-2, which economists in a Reuters poll this week projected taking place in 2029 or 2030.

"We stand ready," Kurali said. "As soon as the government makes the decision to launch the euro adoption process, we will support it with all of our experience and expertise."

He said main external risks included volatile energy prices and climate change effects, which have already lopped 0.4 percentage point off this year's economic growth, according to the central bank's estimates, while raising inflation risks.

Kurali highlighted strong wage and services price growth as key domestic risks, and said the reduction in the inflation target should make economic players adapt to a lower cost environment, ending double-digit wage rises.

Companies should boost productivity to avoid a wage-price spiral, he said, adding that services inflation in the 5% to 6% range, while boosted by one-off price adjustments in banking and telecoms, was too strong.

(Reporting by Gergely Szakacs and Krisztina Than; Editing by Xevi Fontdegloria)