By Gergely Szakacs and Krisztina Than

BUDAPEST (Reuters) – Hungary's central bank left its base rate steady at the European Union's joint highest level of 6.5% on Tuesday, as widely expected. This decision follows a decline in the forint since its latest rate cut and tax hikes that have sharply raised next year's inflation path.

S&P Global reported on Thursday that central Europe's monetary easing campaign has entered a riskier stage, with a higher likelihood of policy missteps due to global economic uncertainty and exchange rate volatility.

The Czech National Bank is also expected to keep its main rate unchanged on Thursday, likely marking the first time since Hungary began cutting rates in May 2023 that all four central banks in the region have held rates steady in the same month.

The National Bank of Hungary (NBH) has reduced interest rates by a total of 11.5 percentage points, aided by a retreat in inflation from the EU's highest levels. However, it has now maintained borrowing costs for a third consecutive meeting.

The forint, which fell to record lows against the euro in late 2022, has dropped about 4% since the bank's latest rate cut on September 24, and is nearly 7% down against the euro this year, lagging behind central European currencies.

At 1505 GMT, it traded at 409.6 per euro, weaker than levels around 409.1 before the rate announcement.

The bank noted that the forint's decline and tax hikes aimed at addressing Hungary's chronic budget deficit have increased next year's inflation path by about 50 basis points to a range of 3.3% to 4.1%, delaying the achievement of its 3% inflation target until 2026.

When asked about avoiding rate tightening despite the forint's fall and heightened inflation outlook, Deputy Governor Barnabas Virag stated that the NBH had tightened monetary conditions by abstaining from the anticipated rate cuts.

"When we discussed the monetary policy outlook in September, there were expectations for another rate cut by the end of 2024 and an additional one in the first quarter of 2025," Virag explained. He emphasized that the central bank has effectively tightened since it did not implement another rate cut this year, asserting that the 6.5% base rate is appropriate based on the current outlook.

Virag also mentioned upside risks to inflation and indicated that a key question for next year, when a new governor takes office, would be whether Hungary can maintain inflation at a lower, sustainable range.

Despite raising the inflation forecast for next year, one policymaker proposed a 25 basis point rate cut on Tuesday, indicating a division within the rate-setting Monetary Council, which previously delivered unanimous decisions.

The latest Reuters poll forecasts suggest just 100 basis points of additional rate easing in Hungary and Poland by the fourth quarter of 2025, and 75 basis points in the Czech Republic and Romania.

After numerous rate cuts totaling hundreds of basis points, risks from wage growth, persistent services inflation, large budget deficits, and currency volatility amidst concerns over global trade wars complicate the policy outlook in central Europe.