The National Bank of Hungary has only just begun the easing cycle, and may cut the base rate by another 300 bp or more over the next 12-18 months, Merrill Lynch predicted in a regional overview released last Friday. The analysts now expect the interest rate to by lowered to 5.5% by Q3 2010; in an early August report Merrill saw this scenario arising no sooner than Q4 2010.
According to the latest Merrill Lynch report, Hungary may lower the base rate to 5.5% by Q3 2010. “We believe our interest rate forecast is actually quite conservative, as Taylor-like policy rules would suggest an interest rate of about 2% for a country in Hungary's cyclical position," the analysts noted.
Barclays Capital envisioned more robust interest rate cuts in a recent forecast. Barclays believes the rate may be lowered to 5% by Q2 2010.
In Merrill's estimate, Hungary may witness a negative output gap of 7.5%-9% and inflation below 2% over the next 24 months.
The Merrill report, released before Monday's rate decision, upholds the view that monetary easing may continue with another 50 bp next month to 7.5%. The investment bank is predicting Hungary may lower the rate to 7% by end-2009, 6.5% by Q1 2010, to 6% by the end of June 2010 and 5.5% a month later. Merrill argued markets are currently pricing in 6.4% base rate for end-Q3 2010, underestimating the size of rate cuts by then.
Supposedly reached by Q3 2010, a base rate of 5.5% may still provide the National Bank with a “more-than-sufficient cushion" in case optimism in capital markets erodes to which investments in Hungary is sensitive. In a report issued a few weeks ago, the bank noted that while fundamentally Hungary is one of weakest emerging CEE economies, its currency is one of those most closely correlating with S&P 500.
The sensitivity of Hungarian markets and a potential increase in risk aversion may pose the biggest threat to the current base rate forecast, Merrill said last Friday.
Central banks in the EEMEA region may follow completely different strategies in the coming months, Merrill claimed, arguing that countries with a healthy financial sector and relatively favourable economic environment will distinguish themselves with early rate hikes. In this environment, the first rate hike in Hungary may take place in late 2011, Merrill said, projecting 6% base rate by end-2011.
In a section on Hungary's economic outlook, Merrill states Hungary has probably left the bottom of the curve behind at some point in Q1 or Q2. Consumption costs are an uncertainty factor in the forecast, however recovery in the industrial sector has been very promising and may cause a pleasant surprise in the near future, Merrill said.
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