Economy 16 November 2006, 8:39am

Portfolio.hu POLL - Hungary cenbank to hike rates last this year

Portfolio

The Hungarian statistics office's Tuesday report about a pick-up in inflation in October (6.3% vs. 5.9% in Sept ) and the forint's gradual strengthening against the euro have not changed the consensus estimate in merit that Portfolio.hu's poll showed on Monday. In that survey analysts have projected that the Monetary Council will raise the base rate by 25 basis points to 8.25% on 20 November. At the same time it is a crucial change in views from a month ago that now the respondents believe the end of the central bank's (NBH) rate hike streak will be reached this month.

In a similar poll a month ago, 8 analysts forecast the end-2006 base rate at 8.50%, 7 said it would stand at 8.25% and the rest put it to between 8.00% and 9.25%. In our Wednesday poll, however, 7 of the 18 analysts polled said the base rate would be at 8.25% at the end of the year and 5 expect it to go up to 8.50%. Other gave projections of a rate between 8.00% and 8.75%.According to the fresh consensus estimate, the tightening cycle will come to an end in November at a base rate of 8.25%. Uncertainties about the rate path, however, are well reflected by the fact that 6 analysts still projected a rise in rates for the first quarter of 2007.

The NBH started monetary tightening in June this year and has raised the base rate by a total of 200 basis points since then, primarily due to the worsening inflation outlook. Out of the 16 analysts that gave an estimate on the end-2007 benchmark rate, only one said there would be no cut to the base rate by then. According to the consensus, key rates will be at 7.25% at the end of next year.

Contrary to our previous polls, we have not limited the analysts' choice on EUR/HUF by giving them 10-forint ranges to pick from. The median of answers (261) indicate that they expect the HUF to weaken some to the EUR by end-2006, at least from Wednesday's closing levels at around 257. The respondents see the forint at 260 at the end of June next year.

(The government's austerity measures should start to bear fruit by June, and this is why we picked this date for an EUR/HUF projection.)

Several analysts noted that the EUR/HUF exchange rate may remain under great influence by global risk appetite, which has increased in the past weeks, contributing to a firming of the HUF and a drop in government security yields. Pressure on the central bank to hike rates could certainly ease now that the HUF strengthened to an 8-month high this week, since a stronger forint pushes inflation lower.

Uncertainty about a wide-scale and massive increase of regulated prices early next year is high, therefore risks to inflation are on the upside. Because of this, the stop of the tightening cycle in November may in the end prove to be premature. Oil prices may not stabilise at current (relatively low) levels (both upside and downside risks) and the growth of risk appetite could also turn around. The high nominal interest rate in Hungary, however, could remain to be appealing to emerging market investors.

The NBH is now focusing on its 2008 inflation target (3% +/- 1 ppt), and the map to reach it may be drawn with a fine brush in these very months. What can be said for certain is that the split in the MPC will grow, which is another reason the peak of the tightening cycle and the subsequent rate cuts remain in the mist.