Economy
INSTANT VIEW - Hungary c.bank cuts base rate 50 bps, widens corridor (4)
(Adds comment by RBS, Commerzbank, Goldman Sachs on page2)
While Hungary’s Monetary Council has lowered its benchmark policy rate by 50 basis points to 6.50% on Monday, as expected by the market, it has increasedd the width of the interest rate corridor determined by the overnight credit and deposit facilities to +/- 100 basis points, and raised the interest rate of the two week fixed-rate credit tenders to 50 basis above the base rate.
“The NBH cut its benchmark rate by 50 bps (on the fifth consecutive occasion), in line with our expectations. The new 6.5% level is the lowest since mid-2006. Larger cuts were probably also discussed, just like in October (in line with the MPC’s announced desire to be predictable and cautious). In fact, the equal-sized cuts can allow the market to give signals in case it senses that the rate is about to become dangerously low ("danger" meaning higher forint volatility and a reversal in yields) or that rate cuts are too large in size."
“Overall, the reasons for the cut are still the same as they have been for the past few months: a stronger and more stable forint, declining bond market yields, successful bond auctions, a relatively lower CDS spread, an improving external position, lower base rates in other countries of similar risk assessment, the need for greater forint loan competitiveness and expectations of fragile economic growth. Inflation is also forecast to severely undershoot the target in H2 2010."
“Should these supportive conditions prevail during the rest of the year as well, rates could be cut further. Our current year-end forecast stands at 6 percent, although we do expect the MPC to slow down its easing cycle early next year."
“As another interesting aspect, the corridor between the O/N credit and deposit facilities has been widened to +/-100 bps and the rate on two-week fixed-rate credit tenders to a level equaling the benchmark+50 bps. The move could increase credit flow in the banking system and reduce the amount of money parked at the central bank. Also, it can increase the costs of any speculative activity."
Gábor Ambrus, 4Cast, Sofia
“Confirming to universal expectations but defying our call for a 75bp cut, the MPC has trimmed the base rate by another 50bp to 6.50%. At he same time, the MPC has also widened the interest rate corridor, from +-50bp to +-100bp, effectively cutting 100bp in the O/N deposit rate and leaving the repo rate unchanged. The aim of the move is probably to force some of the hot/spec money out of the system, though arguably, the bulk of the hot money is sitting in the 2W NBH bills. A small step forward hence, rather just a signal at this stage, more will have to be done to achieve greater effect."
“Today will see the main figures of the new CPI report released (full report due on Wed only) - we expect substantial chances for deflation projected in the second half of 2010. Though he rate decision is as expected, the low CPI path could still fuel further rate cut thinking, albeit Governor Simor will likely go cautious on the press conference."
Gyula Tóth, UniCredit, Vienna
“In line with market consensus the NBH MPC cut rates by 50bp to 6.50%. In a "surprise" move the NBH widened the O/N corridor to ±100bp from the previous ±50bp. With this move the MPC put the corridor back to the level we had before October 2008 (when NBH was struggling with weak HUF)."
“On the other hand we think that the signal of the corridor widening is pretty important. #1 the effective rate cut for some local banks (current HUF175bn is deposited at the NBH in O/N facility) is bigger than the headline 50bp. #2 we think that the decision suggests that the NBH is pretty comfortable with the current EUR/HUF level (we also note that from technical perspective the NBH last time widened the corridor in January 2003 when they were "fighting" against the too strong HUF)."
Lars Christensen, Danske Bank, Copenhagen
“Today the Hungarian central bank (MNB) cut its key policy rate by another 50bp to 6.50%- in line with our and consensus expectations. It should however also be noted that the MNB widened the corridor for the overnight rate to +/-100bp from previous +/-50bp. This should could reduce carry on long forint positions and hence curb inflows into the Hungarian markets."
“The decision to continue the monetary easing cycle has to be seen in light of the fact that Hungarian inflation has continued to surprise on the downside in recent months and the economy still remains very weak. Furthermore, the decision was clearly supported by the fact that global appetite for Hungarian assets remains relatively strong and the forint has remained pretty stable recently."
“The MNB today also published new inflation forecasts. The MNB’s inflation forecasts are pretty close to our forecasts at least for 2009 and 2010. In 2009 and 2010 the MNB expects inflation at 4.2% y/y (Danske: 4.1% y/y) and 3.9% y/y (Danske: 3.9% y/y) respectively. In 2011 the MNB expects inflation at 1.9% y/y - somewhat below our forecast of 3.6% y/y."
“Similarly the MNB published new GDP growth forecasts. The MNB expects GDP growth of -6.7% y/y, -0.6% y/y and 3.4% y/y in 2009, 2010 and 2011 respectively. We expect GDP growth at -6.6% y/y, 1.7% y/y and 2.7% y/y in those years. Hence, the MNB expects a slightly faster and stronger recovery than we do, but overall the two sets of forecasts do not differ much. Hungary is still in a fragile recovery, but it is nonetheless a recovery."
“MNB’s statement that accompanied the rate decision did not surprise much either. The MNB basically noted that inflationary pressures are weak and that a significant improvement in global risk appetite makes monetary easing possible. Most notable in our view is that the MNB says that "there is a risk that the pace of the recent increase in risk appetite has been faster than would be justified by the improvements in global economic fundamentals"."
“That basically means that the MNB fears a set-back in risk appetite and therefore thinks that there should be "caution in policy-setting" going forward. Concluding, the MNB is keeping the door open for rate cuts but it is certainly not wide open and a sell-off in HUF could fast close that door."
While Hungary’s Monetary Council has lowered its benchmark policy rate by 50 basis points to 6.50% on Monday, as expected by the market, it has increasedd the width of the interest rate corridor determined by the overnight credit and deposit facilities to +/- 100 basis points, and raised the interest rate of the two week fixed-rate credit tenders to 50 basis above the base rate.
CIB, 4Cast, UniCredit, Danske.
György Barta, CIB Bank, Budapest “The NBH cut its benchmark rate by 50 bps (on the fifth consecutive occasion), in line with our expectations. The new 6.5% level is the lowest since mid-2006. Larger cuts were probably also discussed, just like in October (in line with the MPC’s announced desire to be predictable and cautious). In fact, the equal-sized cuts can allow the market to give signals in case it senses that the rate is about to become dangerously low ("danger" meaning higher forint volatility and a reversal in yields) or that rate cuts are too large in size."
“Overall, the reasons for the cut are still the same as they have been for the past few months: a stronger and more stable forint, declining bond market yields, successful bond auctions, a relatively lower CDS spread, an improving external position, lower base rates in other countries of similar risk assessment, the need for greater forint loan competitiveness and expectations of fragile economic growth. Inflation is also forecast to severely undershoot the target in H2 2010."
“Should these supportive conditions prevail during the rest of the year as well, rates could be cut further. Our current year-end forecast stands at 6 percent, although we do expect the MPC to slow down its easing cycle early next year."
“As another interesting aspect, the corridor between the O/N credit and deposit facilities has been widened to +/-100 bps and the rate on two-week fixed-rate credit tenders to a level equaling the benchmark+50 bps. The move could increase credit flow in the banking system and reduce the amount of money parked at the central bank. Also, it can increase the costs of any speculative activity."
Gábor Ambrus, 4Cast, Sofia
“Confirming to universal expectations but defying our call for a 75bp cut, the MPC has trimmed the base rate by another 50bp to 6.50%. At he same time, the MPC has also widened the interest rate corridor, from +-50bp to +-100bp, effectively cutting 100bp in the O/N deposit rate and leaving the repo rate unchanged. The aim of the move is probably to force some of the hot/spec money out of the system, though arguably, the bulk of the hot money is sitting in the 2W NBH bills. A small step forward hence, rather just a signal at this stage, more will have to be done to achieve greater effect."
“Today will see the main figures of the new CPI report released (full report due on Wed only) - we expect substantial chances for deflation projected in the second half of 2010. Though he rate decision is as expected, the low CPI path could still fuel further rate cut thinking, albeit Governor Simor will likely go cautious on the press conference."
Gyula Tóth, UniCredit, Vienna
“In line with market consensus the NBH MPC cut rates by 50bp to 6.50%. In a "surprise" move the NBH widened the O/N corridor to ±100bp from the previous ±50bp. With this move the MPC put the corridor back to the level we had before October 2008 (when NBH was struggling with weak HUF)."
“On the other hand we think that the signal of the corridor widening is pretty important. #1 the effective rate cut for some local banks (current HUF175bn is deposited at the NBH in O/N facility) is bigger than the headline 50bp. #2 we think that the decision suggests that the NBH is pretty comfortable with the current EUR/HUF level (we also note that from technical perspective the NBH last time widened the corridor in January 2003 when they were "fighting" against the too strong HUF)."
Lars Christensen, Danske Bank, Copenhagen
“Today the Hungarian central bank (MNB) cut its key policy rate by another 50bp to 6.50%- in line with our and consensus expectations. It should however also be noted that the MNB widened the corridor for the overnight rate to +/-100bp from previous +/-50bp. This should could reduce carry on long forint positions and hence curb inflows into the Hungarian markets."
“The decision to continue the monetary easing cycle has to be seen in light of the fact that Hungarian inflation has continued to surprise on the downside in recent months and the economy still remains very weak. Furthermore, the decision was clearly supported by the fact that global appetite for Hungarian assets remains relatively strong and the forint has remained pretty stable recently."
“The MNB today also published new inflation forecasts. The MNB’s inflation forecasts are pretty close to our forecasts at least for 2009 and 2010. In 2009 and 2010 the MNB expects inflation at 4.2% y/y (Danske: 4.1% y/y) and 3.9% y/y (Danske: 3.9% y/y) respectively. In 2011 the MNB expects inflation at 1.9% y/y - somewhat below our forecast of 3.6% y/y."
“Similarly the MNB published new GDP growth forecasts. The MNB expects GDP growth of -6.7% y/y, -0.6% y/y and 3.4% y/y in 2009, 2010 and 2011 respectively. We expect GDP growth at -6.6% y/y, 1.7% y/y and 2.7% y/y in those years. Hence, the MNB expects a slightly faster and stronger recovery than we do, but overall the two sets of forecasts do not differ much. Hungary is still in a fragile recovery, but it is nonetheless a recovery."
“MNB’s statement that accompanied the rate decision did not surprise much either. The MNB basically noted that inflationary pressures are weak and that a significant improvement in global risk appetite makes monetary easing possible. Most notable in our view is that the MNB says that "there is a risk that the pace of the recent increase in risk appetite has been faster than would be justified by the improvements in global economic fundamentals"."
“That basically means that the MNB fears a set-back in risk appetite and therefore thinks that there should be "caution in policy-setting" going forward. Concluding, the MNB is keeping the door open for rate cuts but it is certainly not wide open and a sell-off in HUF could fast close that door."
