Economy
Huge divide on market over possible outcome of Hungary's rate meeting today
Someone expects the MPC to hold rates today
Stockholm-based Skandinaviska Enskilda Banken (SEB) expects the MPC to be on hold today for yet another go.
“We however see the NBH to repeat its readiness to hike would risk-aversion in Europe prove to be long-lasting. Eventually, this will, in our view, lead to a 50bps hike in some of the meetings beyond tomorrows', or possibly at an inter-meeting event. According to the wait-and-see policy adopted at previous meetings, the NBH should still await the effect of IMF-discussions, ECB-policies and the unfolding of the Euro-crisis before enacting a hike."
Analysts at SEB believe that the rise in EUR/HUF from around 300 at the time of the last meeting in October, to currently 308.50 is pointing in the direction of a hike, but not strongly enough as they see it.
Yesterday, the forint was one of the best performing currencies in the region with EUR/HUF moving from 314 to 308.50 levels. “Interest rates dropped initially but recovered later and closed almost unchanged. In case we are right we expect to see higher EURHUF and lower interest rates in Hungary today."
A key credibility test to monetary policy
Eszter Gárgyán, analyst at Citi in Budapest, highlighted the high uncertainties surrounding today’s rate decision. “We have little information about the four new, government-appointed MPC members' attitude under extraordinary circumstances," she said.
The analyst pointed out that the MPC has signalled in its statement issued following the non-rate setting meeting from 15 Nov that it is likely to hike rates gradually and refrain from emergency hikes, despite the weakness in the currency.
“In our view, the sharp rise in local risk premiums, the inflation outlook, weak demand on government paper actions and financial stability risks owing to currency weakening support the argument for rate hikes."
Having said that, Gárgyán believes that the government's unexpected announcement about seeking new cooperation with the IMF “is likely to weaken the MPC's rate hiking bias, given the expected decline in risk premiums if the government finally pledges a new deal with the IMF."
“The risk of further credit rating downgrades to sub-investment grade following Moody's move from last Friday and the uncertainty related to the outcome of IMF negotiations however, may put further pressure on Hungarian assets if euro zone financing conditions fail to improve in the short term," she added.
In her view, the outcome of the rate decision and the tone of the statement will “prove an important credibility test to monetary policy independence given the ongoing political tensions between the Central Bank and the government."
“Failure to gather support for a rate hike or sticking to an overly optimistic risk assessment of domestic factors may hamper risk assessment further and highlight institutional risks that have also contributed to Hungary's deteriorating credit rating."
Gárgyán believes a 50-bp hike with a hawkish statement would be needed to curb depreciation pressures but she sees greater chance for a 25bp hike, given the split in the MPC, which may lead to further currency weakening.
Base rate to be taken to 8.00% - gradually or in one fell swoop
Magdalena Polan at Goldman Sachs in London thinks that the NBH will “raise rates to fight capital outflows and prevent a further weakening of the currency."
“On balance we believe that the MPC will opt for stepwise hikes from 6.0% currently to 8.0% by the end of Q1 starting with a, most likely, 50bp hike this week and following up with smaller 25-50bps hikes in the coming months; with additional increases conditional on market reactions and the progress in the negotiations with the IMF."
There is, in her view, also a possibility that the MPC will opt for a 200bps immediate hike in this week’s meeting - however, given the divisions on the MPC this is less likely. In any case, we expect the hikes to be reversed starting in mid-2012, once an agreement with the IMF is reached and the exchange rate has stabilized."
Given that the views of the MPC members have been very divided, Polan thinks the MPC is more likely to hike in several steps, monitoring the market reaction in between.
The risk of more gradual hikes, in her view, is that “the lack of the new IMF agreement or further downgrades would necessitate more hikes and the MPC may end up tightening more than it would if it decided to step in decisively from the start instead."
Following such hikes, Polan would expect the MPC to remain on hold in Q2, and then start to gradually reverse the hikes, and bring the policy rate back to 6% in around 12 month’s time, depending on the timing of any IMF program and the ability to stabilize the exchange rate.
“The prospects of reaching another IMF deal (in our view, still some time away) and its expected catalytic effects on external financing will support those MPC members who want to proceed more cautiously. Support for rate hikes may also come at some concessions from the more ‘hawkish’ MPC members. To offset even more tightening in local financial conditions, the MPC may agree to offer additional liquidity support (including FX); additional measures like purchases of corporate debt by the NBH, as suggested by the government, seem unlikely, though."
Polan also finds it possible that the MPC will in the end conclude that if there is not enough support for a very decisive step and a large hike, it would be better to stay put, instead of proceeding with cautious smaller hikes which may turn out ineffective and would hit the MPC’s credibility.
“Pressure on the Forint and local yields would then mean the MPC may decide to step in only in December, or when it concludes that there has not been enough progress over the IMF deal to avert another crisis."
MPC composition is important now!
Elisabeth Andreew at Nordea in Copenhagen expects a 25-bp rate hike today, saying the MPC “has become increasingly hawkish, indicating concerns over capital flight that could further pressure the HUF and destabilise the country’s financial system."
She also noted that inflationary pressures have also increased from the VAT hikes and the weaker HUF.
“Tomorrow’s decision is surrounded by extreme uncertainty. We have now changed our view from unchanged rates to a hike of a mere 25 bp. A hike of 50 bp is possible and would send a stronger signal to markets, but we think the MNB will start slowly and see how markets generally develop. The composition of the MPC may be of importance for the first time. We expect that MNB Governor Orban and the two old MPC members will go for 50 bp while the four new members, backed up by the government, may prefer unchanged rates. With an economy in dire straits and a government that tries to rescue people from the “FX loan trap", rate hikes are of course not the optimal solution," Andreew said.
In her view, unchanged interest rates will probably weaken the HUF again while 50 bp would probably strengthen the currency.
Two choices: hold or hike aggressively
Gillian Edgeworth and Gyula Tóth, analysts at UniCredit believe the MPC faces a “tough choice" between leaving rates on hold or hiking rates aggressively.
“We favour the first option but believe that the second will be debated in depth." They will also keep a close eye on Thursday's bond auction where the Government Debt Management Agency (ÁKK) plans to sell HUF 35 bn HGBs.
“The issue at this stage is clear - a need to stabilise investor confidence," Edgeworth and Tóth said, noting that following the Moody's downgrade to junk, conditions within the domestic fixed income market “significantly threaten the government's access to financing."
Five year sovereign CDS jumped to an all time high last Friday. EUR/HUF is trading not far from where it was when the NBH issued a statement after its non-rate setting meeting on 15th November warning about the potential need for a rate hike, they added.
“In taking this decision, the NBH will have to weigh the ammunition it has available to it. Given pending payments to the EU and IMF and uncertainty on when the government can access eurobond markets, the NBH has little confidence in its ability to defend HUF with FX intervention. This leaves the Bank with a choice of leaving rates on hold or hiking rates to increase the cost of any HUF shorts and provide longer term investors with some confidence that the domestic authorities are taking some measures."
Policy mistake vs. the last bazooka
The analysts believe that at this stage a modest 25/50bp hike would “risk being perceived as a policy mistake," while a larger 200/300/400bp hike would have a near term impact “but also represents the NBH's last bazooka."
“The combination of a higher risk premium combined with a signal from the NBH that it is willing to take aggressive action will buy Hungary time but exactly how is unclear. In part this will prove a function of EMU developments and the size of the hike. But there is also more downside to such a policy this time around than in the past. The 'shock factor' is smaller each time the NBH employs such a policy while domestic demand is in the doldrums."
On hold is most likely
“Uncertainty on voting patterns and a lack of progress on an IMF deal means that we see the most likely outcome as rates on hold tomorrow," Edgeworth and Tóth said.
“The pressure to hike rates tomorrow will be sourced from the NBH's longer standing three internal members. But we are not convinced that one of the four remaining members on the Council, appointed by the government, will be willing to support an aggressive rate hike at this stage."
Timothy Ash at the Royal Bank of Scotland said that given the extreme pressure felt on the forint over the past month or so “the only question in the market's mind is how far the MPC opts to hike policy rates."
He is currently calling for only a 25bps rate hike this time around.
He argues for this view by saying that:
1) At recent MPC meetings members have seemingly overwhelmingly voted to keep policy rates unchanged, and even as recently as the September meeting the debate seemed to be couched more in terms of a bias towards easing given the weak growth momentum in the economy and moderating inflationary risks.
2) The surprise statement released by the NBH on 15 Nov in response to selling pressure on the HUF was, in Ash’s view, “a hardly a robust and convincing defence of the forint - surely a better defence would have been to argue that the NBH was prepared to do whatever it takes to defend the currency."
3) The growth/inflation outlook for the economy does indeed appear deflationary, with the government revising down its growth estimate for 2012 below earlier 1.5% growth forecasts, and the OECD even yesterday speaking about the economy actually going into recession next year. Against this backdrop Ash would expect MPC members “to be loathed to hike policy rates aggressively, especially when the government is signalling a desire to cut a deal with the IMF, and as the NBH argued above - they don't see the HUF as fundamentally over-valued."
4) Recent changes to the composition of the MPC suggests a “much more dovish bias" than in the 2008-2010 era, when the NBH seemed much more willing to react to perceived "market" risk by hiking policy rates.
5) A dominant view within the NBH is strongly supportive of the government moving quickly to conclude a new IMF agreement, with vigorous conditionality. “We sense from various statements from the NBH that they feel uncomfortable - like the market - with various aspects of government policy, and would feel that only a suitably conditional IMF programme, would provide an adequate policy safeguard. Arguably a new IMF programme would also help ring-fence the NBH itself which it has been argued has been subject to efforts by the government to rein in its independence. Arguably continued market pressure on Hungary is now the best means to ensure that the government quickly cuts a deal with the Fund - perhaps aggressive policy hikes by the NBH now would ease short term market pressure, but might leave the bank even more exposed to criticism/pressure from the government."
Stockholm-based Skandinaviska Enskilda Banken (SEB) expects the MPC to be on hold today for yet another go.
“We however see the NBH to repeat its readiness to hike would risk-aversion in Europe prove to be long-lasting. Eventually, this will, in our view, lead to a 50bps hike in some of the meetings beyond tomorrows', or possibly at an inter-meeting event. According to the wait-and-see policy adopted at previous meetings, the NBH should still await the effect of IMF-discussions, ECB-policies and the unfolding of the Euro-crisis before enacting a hike."
Analysts at SEB believe that the rise in EUR/HUF from around 300 at the time of the last meeting in October, to currently 308.50 is pointing in the direction of a hike, but not strongly enough as they see it.
Yesterday, the forint was one of the best performing currencies in the region with EUR/HUF moving from 314 to 308.50 levels. “Interest rates dropped initially but recovered later and closed almost unchanged. In case we are right we expect to see higher EURHUF and lower interest rates in Hungary today."
A key credibility test to monetary policy
Eszter Gárgyán, analyst at Citi in Budapest, highlighted the high uncertainties surrounding today’s rate decision. “We have little information about the four new, government-appointed MPC members' attitude under extraordinary circumstances," she said.
The analyst pointed out that the MPC has signalled in its statement issued following the non-rate setting meeting from 15 Nov that it is likely to hike rates gradually and refrain from emergency hikes, despite the weakness in the currency.
“In our view, the sharp rise in local risk premiums, the inflation outlook, weak demand on government paper actions and financial stability risks owing to currency weakening support the argument for rate hikes."
Having said that, Gárgyán believes that the government's unexpected announcement about seeking new cooperation with the IMF “is likely to weaken the MPC's rate hiking bias, given the expected decline in risk premiums if the government finally pledges a new deal with the IMF."
“The risk of further credit rating downgrades to sub-investment grade following Moody's move from last Friday and the uncertainty related to the outcome of IMF negotiations however, may put further pressure on Hungarian assets if euro zone financing conditions fail to improve in the short term," she added.
In her view, the outcome of the rate decision and the tone of the statement will “prove an important credibility test to monetary policy independence given the ongoing political tensions between the Central Bank and the government."
“Failure to gather support for a rate hike or sticking to an overly optimistic risk assessment of domestic factors may hamper risk assessment further and highlight institutional risks that have also contributed to Hungary's deteriorating credit rating."
Gárgyán believes a 50-bp hike with a hawkish statement would be needed to curb depreciation pressures but she sees greater chance for a 25bp hike, given the split in the MPC, which may lead to further currency weakening.
Base rate to be taken to 8.00% - gradually or in one fell swoop
Magdalena Polan at Goldman Sachs in London thinks that the NBH will “raise rates to fight capital outflows and prevent a further weakening of the currency."
“On balance we believe that the MPC will opt for stepwise hikes from 6.0% currently to 8.0% by the end of Q1 starting with a, most likely, 50bp hike this week and following up with smaller 25-50bps hikes in the coming months; with additional increases conditional on market reactions and the progress in the negotiations with the IMF."
There is, in her view, also a possibility that the MPC will opt for a 200bps immediate hike in this week’s meeting - however, given the divisions on the MPC this is less likely. In any case, we expect the hikes to be reversed starting in mid-2012, once an agreement with the IMF is reached and the exchange rate has stabilized."
Given that the views of the MPC members have been very divided, Polan thinks the MPC is more likely to hike in several steps, monitoring the market reaction in between.
The risk of more gradual hikes, in her view, is that “the lack of the new IMF agreement or further downgrades would necessitate more hikes and the MPC may end up tightening more than it would if it decided to step in decisively from the start instead."
Following such hikes, Polan would expect the MPC to remain on hold in Q2, and then start to gradually reverse the hikes, and bring the policy rate back to 6% in around 12 month’s time, depending on the timing of any IMF program and the ability to stabilize the exchange rate.
“The prospects of reaching another IMF deal (in our view, still some time away) and its expected catalytic effects on external financing will support those MPC members who want to proceed more cautiously. Support for rate hikes may also come at some concessions from the more ‘hawkish’ MPC members. To offset even more tightening in local financial conditions, the MPC may agree to offer additional liquidity support (including FX); additional measures like purchases of corporate debt by the NBH, as suggested by the government, seem unlikely, though."
Polan also finds it possible that the MPC will in the end conclude that if there is not enough support for a very decisive step and a large hike, it would be better to stay put, instead of proceeding with cautious smaller hikes which may turn out ineffective and would hit the MPC’s credibility.
“Pressure on the Forint and local yields would then mean the MPC may decide to step in only in December, or when it concludes that there has not been enough progress over the IMF deal to avert another crisis."
MPC composition is important now!
Elisabeth Andreew at Nordea in Copenhagen expects a 25-bp rate hike today, saying the MPC “has become increasingly hawkish, indicating concerns over capital flight that could further pressure the HUF and destabilise the country’s financial system."
She also noted that inflationary pressures have also increased from the VAT hikes and the weaker HUF.
“Tomorrow’s decision is surrounded by extreme uncertainty. We have now changed our view from unchanged rates to a hike of a mere 25 bp. A hike of 50 bp is possible and would send a stronger signal to markets, but we think the MNB will start slowly and see how markets generally develop. The composition of the MPC may be of importance for the first time. We expect that MNB Governor Orban and the two old MPC members will go for 50 bp while the four new members, backed up by the government, may prefer unchanged rates. With an economy in dire straits and a government that tries to rescue people from the “FX loan trap", rate hikes are of course not the optimal solution," Andreew said.
In her view, unchanged interest rates will probably weaken the HUF again while 50 bp would probably strengthen the currency.
Two choices: hold or hike aggressively
Gillian Edgeworth and Gyula Tóth, analysts at UniCredit believe the MPC faces a “tough choice" between leaving rates on hold or hiking rates aggressively.
“We favour the first option but believe that the second will be debated in depth." They will also keep a close eye on Thursday's bond auction where the Government Debt Management Agency (ÁKK) plans to sell HUF 35 bn HGBs.
“The issue at this stage is clear - a need to stabilise investor confidence," Edgeworth and Tóth said, noting that following the Moody's downgrade to junk, conditions within the domestic fixed income market “significantly threaten the government's access to financing."
Five year sovereign CDS jumped to an all time high last Friday. EUR/HUF is trading not far from where it was when the NBH issued a statement after its non-rate setting meeting on 15th November warning about the potential need for a rate hike, they added.
“In taking this decision, the NBH will have to weigh the ammunition it has available to it. Given pending payments to the EU and IMF and uncertainty on when the government can access eurobond markets, the NBH has little confidence in its ability to defend HUF with FX intervention. This leaves the Bank with a choice of leaving rates on hold or hiking rates to increase the cost of any HUF shorts and provide longer term investors with some confidence that the domestic authorities are taking some measures."
Policy mistake vs. the last bazooka
The analysts believe that at this stage a modest 25/50bp hike would “risk being perceived as a policy mistake," while a larger 200/300/400bp hike would have a near term impact “but also represents the NBH's last bazooka."
“The combination of a higher risk premium combined with a signal from the NBH that it is willing to take aggressive action will buy Hungary time but exactly how is unclear. In part this will prove a function of EMU developments and the size of the hike. But there is also more downside to such a policy this time around than in the past. The 'shock factor' is smaller each time the NBH employs such a policy while domestic demand is in the doldrums."
On hold is most likely
“Uncertainty on voting patterns and a lack of progress on an IMF deal means that we see the most likely outcome as rates on hold tomorrow," Edgeworth and Tóth said.
“The pressure to hike rates tomorrow will be sourced from the NBH's longer standing three internal members. But we are not convinced that one of the four remaining members on the Council, appointed by the government, will be willing to support an aggressive rate hike at this stage."
Timothy Ash at the Royal Bank of Scotland said that given the extreme pressure felt on the forint over the past month or so “the only question in the market's mind is how far the MPC opts to hike policy rates."
He is currently calling for only a 25bps rate hike this time around.
He argues for this view by saying that:
1) At recent MPC meetings members have seemingly overwhelmingly voted to keep policy rates unchanged, and even as recently as the September meeting the debate seemed to be couched more in terms of a bias towards easing given the weak growth momentum in the economy and moderating inflationary risks.
2) The surprise statement released by the NBH on 15 Nov in response to selling pressure on the HUF was, in Ash’s view, “a hardly a robust and convincing defence of the forint - surely a better defence would have been to argue that the NBH was prepared to do whatever it takes to defend the currency."
3) The growth/inflation outlook for the economy does indeed appear deflationary, with the government revising down its growth estimate for 2012 below earlier 1.5% growth forecasts, and the OECD even yesterday speaking about the economy actually going into recession next year. Against this backdrop Ash would expect MPC members “to be loathed to hike policy rates aggressively, especially when the government is signalling a desire to cut a deal with the IMF, and as the NBH argued above - they don't see the HUF as fundamentally over-valued."
4) Recent changes to the composition of the MPC suggests a “much more dovish bias" than in the 2008-2010 era, when the NBH seemed much more willing to react to perceived "market" risk by hiking policy rates.
5) A dominant view within the NBH is strongly supportive of the government moving quickly to conclude a new IMF agreement, with vigorous conditionality. “We sense from various statements from the NBH that they feel uncomfortable - like the market - with various aspects of government policy, and would feel that only a suitably conditional IMF programme, would provide an adequate policy safeguard. Arguably a new IMF programme would also help ring-fence the NBH itself which it has been argued has been subject to efforts by the government to rein in its independence. Arguably continued market pressure on Hungary is now the best means to ensure that the government quickly cuts a deal with the Fund - perhaps aggressive policy hikes by the NBH now would ease short term market pressure, but might leave the bank even more exposed to criticism/pressure from the government."
