Economists not scared by weak HUF, see Hungary base rate unchanged on 23 Feb - Portfolio.hu POLL

The National Bank of Hungary will keep its key policy rate unchanged on Monday (23 February), breaking its monetary easing cycle started last November, the consensus forecast of analysts showed in a Portfolio.hu poll on Thursday.

The overall opinion of the respondents can be summed up as follows: in the current risk aversion environment the bank has no room to cut rates and a hike would be futile.

The outcome of the survey is consistent with our previous poll, in which we have asked the economists what EUR/HUF level would prompt the NBH to reconsider its monetary policy stance. Then the consensus came to 290-300, which means the analysts have basically stuck to what they said before.

“It would be extremely hard for the NBH to justify cutting interest rates after the wild swings in the HUF seen in recent days. A rate rise looks more likely than a reduction. A rate cut now would be a green light for the market to drive the HUF to ever lower levels against the EUR, which would ultimately end in tears for all concerned," said Nigel Rendell, analyst at the Royal Bank of Canada in London.

Dávid Németh, analyst at ING Bank in Budapest, reiterated its previous view that the pace of rate cuts was too fast. He expected the base rate to be left on hold already in January (when the NBH cut it by 50 bps to 9.50%). “[...] the market is vulnerable, government bond yields have jumped again and I wouldn't exactly call the forint strong, either," he said.

There are only a handful of analysts that project a rate decision other than no change. Mariann Trippon, economist at Budapest's CIB Bank, believes the Monetary Council will only step back a bit, but will not stop in its rate cut cycle.

“Fundamentals continue to justify monetary easing and they even make it necessary. (The level of forint interest rates is also a key from credit market aspects. As foreign currency lending has narrowed drastically and also became more expensive it would be indispensible to dampen rates in order to avoid a dramatic decline in borrowing need that would push the economy into an even deeper recession.)"

“On the other hand, the central bank has been emphasising the priority of financial stability aspects therefore monetary policy needs to remain cautious. Since then, however, the forint has depreciated markedly and it has become a recurring item in the NBH's communication that the excessive volatility of the HUF is detrimental. Consequently, EUR/HUF above 300 will certainly give firepower to the more cautious MPC members," Trippon added.

“Due to the forint's weakening, rate cut expectations have been factored out from the market. Moreover, rate hike expectations came in. At the same time we need to understand that the forint exchange rate is not moved by the interest rate premium, rather global and regional factors. The HUF and the PLN are easing in tandem (moreover, the Polish currency is doing much worse relatively). The forint's course would have probably been the same even if the base rate was 50 bps lower or 50 bps higher," she concluded.

György Barcza, chief analyst at K&H Bank is on the other end of the spectrum - and not on the rosy end. “Yield convergence has collapsed, the long forward spread has widened to never-before-seen levels, not only at government securities but also at IRS (interest rate swaps). The halt in yield convergence may be one of the reasons for the forint's volatility, as one of the stabilizing factors is gone. We also need to see that interest rates that were hiked last autumn in countries in a similar position to Hungary's (Ukraine, Poland) remained at those levels [...], while Hungary has been going against the tide over the past months."

Considering the uncertainties and the cautious forecasts we are not really surprised to see that the consensus forecast for the end-2009 base rate remained unchanged at 7.00%. Note, however, that the projections were in a wide range between 6.00% and 10.50%. The unchanged consensus may be interpreted as a signal that the analysts expect the global environment to become friendlier in the second half of the year, which should widen the elbowroom of Hungarian policymakers in their endeavours to dampen the rate of recession.

“The NBH will be keen to push rates lower over the medium term given the dire state of the real economy, but much will depend on how the HUF holds up and general investor sentiment towards the region," Rendell commented.

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