Economy
INSTANT VIEW - Hungary c.bank takes base rate 50 bps higher after 10-month pause (5)
(Adds comment by HSBC on page3)
Hungary’s central bank (NBH) has raised its key policy rate by 50 basis points to 6.50% on Tuesday, in line with expectations. The majority of the market was expecting a 50-bp monetary tightening, thinking that with that move the NBH could send an appropriately strong message that it is willing to prop up the forint that is weak both from a financial stability and an inflationary point of view, while it can avoid the risk of getting more than what it has bargained for. However, it will take a few months to see whether or not today’s move was the start of a longer tightening cycle.
“I had thought that the NBH might err more towards caution and only go for 25bps...clearly the MPC is suitably worried over the pressure on the forint, and feels the need to send a stronger signal to the market in terms of its willingness to act. 50bps was probably seen as something of a compromise in terms of taking more aggressive action in defense of the forint, a la 2008. Even the doves on the MPC might have viewed this as hopefully buying the government some time in terms of its negotiations with the IMF over a new programme."
György Barta, CIB Bank, Budapest
“The 50-bp hike can be considered as an imperfect compromise between rate-setters who may have argued for larger hikes and the four parliament-delegated members who may have rather had a wait-and-see stance (there was no optimal solution in this situation)."
“Clearly, the central bank remains well behind the curve and although it is true that its monetary ammunition should not be depleted (especially in light of the negative trends in Western Europe), 50 bps will do little to soothe the market, the decision has absolutely no shock value."
“The EUR/HUF has been brought down to below 310 from an earlier peak but the historical high is still in sight and the CDS is still well above 600 bps. The weak rate decision can be compared to the weak verbal intervention seen a few weeks ago, although its graduality can be understood (the fragile market situation could have also been upset by a much greater hike)."
“Still, I would not be surprised at all if the market began to demand an even higher risk premium shortly (market risks are seen as being more important than real economic fundamentals at this point). In a way, the small hike proves the central bank’s shy approach toward hikes and may be an invitation for speculators."
Gábor Ambrus, 4Cast, Sofia
“Analysts were divided, the consensus moved from no change to 25bp hike and then a 50bp hike after Moody’s downgraded Hungary to junk at the end of last week but the range of expectations topped at a 200bp increase, hence it was far from a homogenously expected outcome."
“The market will now closely scrutinise the MPC’s message about the continuation; obviously the main market risk is on the fiscal side but there is some additional uncertainty on the front end of the curve stemming from the market’s heterogeneous view on the short term rate outlook and doubts about how aggressive the four newly appointed MPC members could be. The December inflation report will be key, the MPC may leave some questions for the next rate setting meeting."
Update:
“Analysts were divided, the consensus moved from no change to 25bp hike and then a 50bp hike after Moody’s downgraded Hungary to junk at the end of last week but the range of expectations topped at a 200bp increase, hence it was far from a homogenously expected outcome."
“There were several takeaways from the presser and the MPC statements that are worth bearing in mind."
“Firstly, positive news is that the MPC managed to give a united response to its policy dilemma, this should somewhat sooth market worries. Though the MPC discussed several options, finally only one option was put on the table for voting and this motion was unanimously supported. This is a clear signal, dismissing fears that the politically charged appointment of the four new MPC members could have undermined the council’s decision making capacity. This has never been a big risk in our view but in any case, the fact that the MPC could get untied in a moment of crisis removes one small risk issue from the table."
“Secondly, the MPC clearly gave a strong role to forint in its communication. It said that the inflation outlook mainly worsened due to the forint weakness and it also noted the added balance sheet risks for the economy. These are not novelties but reinforce the widely held view that under the present circumstances, the forint will be a key driver of policy action."
“Interestingly, at some point on the presser Governor Simor seemed to imply that Hungary has come under speculative attack (which from our perspective would increase the risk of rate hikes and open market operations in the near term) but in a subsequent reply to a question he toned his view down significantly and said that there is no proof of speculative attack, just Hungary’s fundamentals makes it prone to attacks."
“Governor Simor again reiterated what the MPC said two weeks ago in an extraordinary intermeeting communiqué that the MPC believes the forint is undervalued but he also said they accept that the market may have a different value judgement in the present circumstances. All in all, this does not in our view suggest an imminent follow up rate hike or interventions, though arguably, further forint weakness may eventually result in further policy action."
“This was also supported by the MPC’s post sitting statement which said that “If the outlook for inflation and risk perceptions remain persistently unfavourable, it may prove necessary to raise interest rates further in the coming months." This sentence from the MPC’s statement was additionally highlighted by Governor Simor on the press conference, though with a clear added verbal emphasis on the ‘and’. Again, this in our view implies no imminent additional action as the CPI outlook is not that bad (as growth projections will be cut) unless of course there is a major s/t deterioration in Hungary’s risk metrics."
“Thirdly, Governor Simor noted the government’s strong commitment to fiscal consolidation and said he’d expect further fiscal action if the budget in 2012 slipped. This also suggests that as long as the fiscal side is bale to meet its commitments, the MPC will likely moderate its actions on rates."
“On balance, risks remain for further rate hikes but clearly, the MPC is not eager to go down on this route and it definitively does not want to be aggressive. Ultimately, the rate path in the coming months will remain strongly contingent on how the EZ crisis pans out and how negotiations with the IMF will go. Short rates should benefit as long as the IMF deal remains on track."
Hungary’s central bank (NBH) has raised its key policy rate by 50 basis points to 6.50% on Tuesday, in line with expectations. The majority of the market was expecting a 50-bp monetary tightening, thinking that with that move the NBH could send an appropriately strong message that it is willing to prop up the forint that is weak both from a financial stability and an inflationary point of view, while it can avoid the risk of getting more than what it has bargained for. However, it will take a few months to see whether or not today’s move was the start of a longer tightening cycle.
RBS, CIB, 4Cast.
Timothy Ash, Royal Bank of Scotland, London “I had thought that the NBH might err more towards caution and only go for 25bps...clearly the MPC is suitably worried over the pressure on the forint, and feels the need to send a stronger signal to the market in terms of its willingness to act. 50bps was probably seen as something of a compromise in terms of taking more aggressive action in defense of the forint, a la 2008. Even the doves on the MPC might have viewed this as hopefully buying the government some time in terms of its negotiations with the IMF over a new programme."
György Barta, CIB Bank, Budapest
“The 50-bp hike can be considered as an imperfect compromise between rate-setters who may have argued for larger hikes and the four parliament-delegated members who may have rather had a wait-and-see stance (there was no optimal solution in this situation)."
“Clearly, the central bank remains well behind the curve and although it is true that its monetary ammunition should not be depleted (especially in light of the negative trends in Western Europe), 50 bps will do little to soothe the market, the decision has absolutely no shock value."
“The EUR/HUF has been brought down to below 310 from an earlier peak but the historical high is still in sight and the CDS is still well above 600 bps. The weak rate decision can be compared to the weak verbal intervention seen a few weeks ago, although its graduality can be understood (the fragile market situation could have also been upset by a much greater hike)."
“Still, I would not be surprised at all if the market began to demand an even higher risk premium shortly (market risks are seen as being more important than real economic fundamentals at this point). In a way, the small hike proves the central bank’s shy approach toward hikes and may be an invitation for speculators."
Gábor Ambrus, 4Cast, Sofia
“Analysts were divided, the consensus moved from no change to 25bp hike and then a 50bp hike after Moody’s downgraded Hungary to junk at the end of last week but the range of expectations topped at a 200bp increase, hence it was far from a homogenously expected outcome."
“The market will now closely scrutinise the MPC’s message about the continuation; obviously the main market risk is on the fiscal side but there is some additional uncertainty on the front end of the curve stemming from the market’s heterogeneous view on the short term rate outlook and doubts about how aggressive the four newly appointed MPC members could be. The December inflation report will be key, the MPC may leave some questions for the next rate setting meeting."
Update:
“Analysts were divided, the consensus moved from no change to 25bp hike and then a 50bp hike after Moody’s downgraded Hungary to junk at the end of last week but the range of expectations topped at a 200bp increase, hence it was far from a homogenously expected outcome."
“There were several takeaways from the presser and the MPC statements that are worth bearing in mind."
“Firstly, positive news is that the MPC managed to give a united response to its policy dilemma, this should somewhat sooth market worries. Though the MPC discussed several options, finally only one option was put on the table for voting and this motion was unanimously supported. This is a clear signal, dismissing fears that the politically charged appointment of the four new MPC members could have undermined the council’s decision making capacity. This has never been a big risk in our view but in any case, the fact that the MPC could get untied in a moment of crisis removes one small risk issue from the table."
“Secondly, the MPC clearly gave a strong role to forint in its communication. It said that the inflation outlook mainly worsened due to the forint weakness and it also noted the added balance sheet risks for the economy. These are not novelties but reinforce the widely held view that under the present circumstances, the forint will be a key driver of policy action."
“Interestingly, at some point on the presser Governor Simor seemed to imply that Hungary has come under speculative attack (which from our perspective would increase the risk of rate hikes and open market operations in the near term) but in a subsequent reply to a question he toned his view down significantly and said that there is no proof of speculative attack, just Hungary’s fundamentals makes it prone to attacks."
“Governor Simor again reiterated what the MPC said two weeks ago in an extraordinary intermeeting communiqué that the MPC believes the forint is undervalued but he also said they accept that the market may have a different value judgement in the present circumstances. All in all, this does not in our view suggest an imminent follow up rate hike or interventions, though arguably, further forint weakness may eventually result in further policy action."
“This was also supported by the MPC’s post sitting statement which said that “If the outlook for inflation and risk perceptions remain persistently unfavourable, it may prove necessary to raise interest rates further in the coming months." This sentence from the MPC’s statement was additionally highlighted by Governor Simor on the press conference, though with a clear added verbal emphasis on the ‘and’. Again, this in our view implies no imminent additional action as the CPI outlook is not that bad (as growth projections will be cut) unless of course there is a major s/t deterioration in Hungary’s risk metrics."
“Thirdly, Governor Simor noted the government’s strong commitment to fiscal consolidation and said he’d expect further fiscal action if the budget in 2012 slipped. This also suggests that as long as the fiscal side is bale to meet its commitments, the MPC will likely moderate its actions on rates."
“On balance, risks remain for further rate hikes but clearly, the MPC is not eager to go down on this route and it definitively does not want to be aggressive. Ultimately, the rate path in the coming months will remain strongly contingent on how the EZ crisis pans out and how negotiations with the IMF will go. Short rates should benefit as long as the IMF deal remains on track."
