Hungary’s central bank cut its base rate by 75 basis points to 8.25%, as expected, slowing the pace of rate cuts after the forint fell to a one-year low, driven in part by an escalating standoff between the bank and the government, writes Reuters.

The National Bank of Hungary (NBH), which has slashed borrowing costs by 975 bps in an easing cycle launched last May, said that monetary policy would enter a new phase, with the pace of rate cuts slowing in the second quarter. Deputy Governor Barnabas Virag told a briefing that monetary policy must remain tight and financial market stability was crucial for achieving the bank"s 3% inflation target in a sustained manner.

“Inflation could return to around the 3% target in 2025”, Virag said, adding that the base rate falling to 6.5-7% by the end of June was a “realistic scenario”. Considering the changes in the global risk environment, the central bank should pursue “an increasingly cautious monetary policy in the second half of the year”, he said. Virag said the bank discussed options for 50 bp, 75 bp and 100 bps cuts, while the decision in the end was unanimous.

Tuesday’s decision was in line with the median forecast of 14 economists in a Reuters poll, which projected that the bank would revert back to a slower pace of easing after temporarily ramping up the speed of rate cuts to 100 bps last month. The cut to the EU’s highest benchmark moves Hungary closer to the 7% key rate in Romania, where strong underlying price pressures and tax hikes at the start of the year have so far prevented the central bank from easing.