Economy
INSTANT VIEW - Hungary central bank raises base rate 50 bps to 7.00% (3)
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(Adds comment by Nomura on page2)
The National Bank of Hungary (NBH) has on Tuesday raised its benchmark interest rate to 7.00% from 6.50%, as widely expected.
The key focus in Hungarian news is last week’s government’s proposal to introduce the bill which effectively merges the central bank and the financial regulator, giving more power to government to appoint the central bank governors.
The European Central Bank (ECB) expressed they were not happy about it and International Monetary Fund (IMF) and the European Commission left the country prematurely last Friday saying they are worried about the central bank independence if the bill comes into force.
European Commission President José Manuel Barosso wrote a letter to Hungarian Prime Minster Viktor Orbán on Monday, asking him to withdraw from the proposal of the new law: “I’d strongly encourage you to withdraw the two cardinal laws that are now in front of parliament".
“The NBH is still worried and rightfully so. Inflation, now at 4.3% y/y, is set to increase further away from the 3% target on HUF weakening, VAT and minimum wage increases next year."
“Secondly, the situation of Hungarian financial markets is far from stable yet, as the uncertainty has increased following the sovereign rating downgrade and the breakdown of IMF talks. The Hungarian government maintains the “my way or the highway" stance, saying they will introduce the controversial bill anyway. Even though government publicly say they want to incorporate ECB proposals, they are not willing to compromise it all - just a few hours ago the head of parliament’s economic committee said that Hungary sticks to the plan to boost the number of MPC members. So, the risks of central bank independency remain unresolved for now. So this central bank move can be also seen as Simor’s revolt.""Soon after the announcement the government went out with the message that the rate hikes will slow down growth. Is this war?"
“The EUR/HUF still lies above the sensitive 300 which the Hungarian authorities are not comfortable with. With the talks on IMF support on hold one of the few leverages the central bank for stabilization of domestic markets is the benchmark interest rate, which they may continue to hike early next year if the tensions persist. Hungary is facing a scenario with a nearly zero growth next year, which will warrant interest rate cuts in H2 2012 once the markets stabilize."
“ EURHUF went down from 301.40 to 300.55, thus reflecting the fact that the interest rate hike was not fully priced in in the FX market. The rate hike was needed just to stabilize the currency, yet with all the political discussions going on and IMF backing of the HUF risks are not fully resolved for now. The HUF 1Y IRS went down by 10bp, however, apparently on profit taking. We are still happy holding 50% of 1Y HUF payers entered at 7%."
György Barta, CIB Bank, Budapest
“The 50-bp hike was in line with our expectations. The central bank was behind the curve, it seemed logical that it would continue tightening after the previous 50-bp hike. Although the EUR/HUF is well off its historical peak, current levels of the forint are probably still too weak for the central bank. We wouldn’t be surprised to see an upside revision in the bank’s inflationary prognosis for next year. The external environment continues to be unsupportive; there has been no major breakthrough in the handling of the EMU debt crisis. Domestically, preliminary talks with the IMF/EU duo broke down and several points of disaccord can be seen between Brussels and the Orbán cabinet (closely linked to the central bank law). Also, minutes of the last meeting implied that another tightening move would take place."
“The central bank has little room for manoeuvre at this point, it merely matched the risk premium requirements of the market. The country’s risk assessment could be more effectively improved by making legislation related to the central bank truly EU-conform and by more governmental flexibility shown at talks with the IMF (including an acceptance of most of the conditionalities that come with a standby agreement)."
Zsolt Kondrát, MKB, Budapest
“The decision to hike rates by 50 bps matched the consensus and exceeded our forecast. Still, the decision does not come as a big surprise as recent government legislative initiatives (like the new central bank law and the abolishment of the contributions to private pension funds for the remaining members) put the official negotiations with the IMF-EU team in jeopardy and led to an early end to the informal negotiations last Friday."
“Without IMF help the financing of the 2012 budget and the existing state debt seems could easily run into trouble as investors are shying away from Europe due to the eurozone debt crisis. In fact, if the IMF-EU negotiations will be unsuccessful then probably more and much larger rate hikes will follow to stem the depreciation of the forint."“As yield spreads remained elevated and the EURHUF remained above 300 despite the rate hike last month, it was inevitable for the central bank to hike rates again. Actually, if Hungarian financial markets remain under pressure then the central bank should go on with the tightening cycle, and this was the reason why we expected only a 25bps hike at this meeting. It is too soon to declare an end to the cycle at this point."
“The central bank will unveil its new inflation report, which is expected to show lower growth and higher inflation forecasts. The Ministry for Economic Affairs criticized the hike, which does not go well with foreign investors, but they are plain wrong. A rate hike today in Hungary actually supports both price stability and growth."
The National Bank of Hungary (NBH) has on Tuesday raised its benchmark interest rate to 7.00% from 6.50%, as widely expected.
The key focus in Hungarian news is last week’s government’s proposal to introduce the bill which effectively merges the central bank and the financial regulator, giving more power to government to appoint the central bank governors.
The European Central Bank (ECB) expressed they were not happy about it and International Monetary Fund (IMF) and the European Commission left the country prematurely last Friday saying they are worried about the central bank independence if the bill comes into force.
European Commission President José Manuel Barosso wrote a letter to Hungarian Prime Minster Viktor Orbán on Monday, asking him to withdraw from the proposal of the new law: “I’d strongly encourage you to withdraw the two cardinal laws that are now in front of parliament".
Nordea, CIB, MKB.
Aurelija Augulyte, Nordea, Copenhagen “The NBH is still worried and rightfully so. Inflation, now at 4.3% y/y, is set to increase further away from the 3% target on HUF weakening, VAT and minimum wage increases next year."
“Secondly, the situation of Hungarian financial markets is far from stable yet, as the uncertainty has increased following the sovereign rating downgrade and the breakdown of IMF talks. The Hungarian government maintains the “my way or the highway" stance, saying they will introduce the controversial bill anyway. Even though government publicly say they want to incorporate ECB proposals, they are not willing to compromise it all - just a few hours ago the head of parliament’s economic committee said that Hungary sticks to the plan to boost the number of MPC members. So, the risks of central bank independency remain unresolved for now. So this central bank move can be also seen as Simor’s revolt.""Soon after the announcement the government went out with the message that the rate hikes will slow down growth. Is this war?"
“The EUR/HUF still lies above the sensitive 300 which the Hungarian authorities are not comfortable with. With the talks on IMF support on hold one of the few leverages the central bank for stabilization of domestic markets is the benchmark interest rate, which they may continue to hike early next year if the tensions persist. Hungary is facing a scenario with a nearly zero growth next year, which will warrant interest rate cuts in H2 2012 once the markets stabilize."
“ EURHUF went down from 301.40 to 300.55, thus reflecting the fact that the interest rate hike was not fully priced in in the FX market. The rate hike was needed just to stabilize the currency, yet with all the political discussions going on and IMF backing of the HUF risks are not fully resolved for now. The HUF 1Y IRS went down by 10bp, however, apparently on profit taking. We are still happy holding 50% of 1Y HUF payers entered at 7%."
György Barta, CIB Bank, Budapest
“The 50-bp hike was in line with our expectations. The central bank was behind the curve, it seemed logical that it would continue tightening after the previous 50-bp hike. Although the EUR/HUF is well off its historical peak, current levels of the forint are probably still too weak for the central bank. We wouldn’t be surprised to see an upside revision in the bank’s inflationary prognosis for next year. The external environment continues to be unsupportive; there has been no major breakthrough in the handling of the EMU debt crisis. Domestically, preliminary talks with the IMF/EU duo broke down and several points of disaccord can be seen between Brussels and the Orbán cabinet (closely linked to the central bank law). Also, minutes of the last meeting implied that another tightening move would take place."
“The central bank has little room for manoeuvre at this point, it merely matched the risk premium requirements of the market. The country’s risk assessment could be more effectively improved by making legislation related to the central bank truly EU-conform and by more governmental flexibility shown at talks with the IMF (including an acceptance of most of the conditionalities that come with a standby agreement)."
Zsolt Kondrát, MKB, Budapest
“The decision to hike rates by 50 bps matched the consensus and exceeded our forecast. Still, the decision does not come as a big surprise as recent government legislative initiatives (like the new central bank law and the abolishment of the contributions to private pension funds for the remaining members) put the official negotiations with the IMF-EU team in jeopardy and led to an early end to the informal negotiations last Friday."
“Without IMF help the financing of the 2012 budget and the existing state debt seems could easily run into trouble as investors are shying away from Europe due to the eurozone debt crisis. In fact, if the IMF-EU negotiations will be unsuccessful then probably more and much larger rate hikes will follow to stem the depreciation of the forint."“As yield spreads remained elevated and the EURHUF remained above 300 despite the rate hike last month, it was inevitable for the central bank to hike rates again. Actually, if Hungarian financial markets remain under pressure then the central bank should go on with the tightening cycle, and this was the reason why we expected only a 25bps hike at this meeting. It is too soon to declare an end to the cycle at this point."
“The central bank will unveil its new inflation report, which is expected to show lower growth and higher inflation forecasts. The Ministry for Economic Affairs criticized the hike, which does not go well with foreign investors, but they are plain wrong. A rate hike today in Hungary actually supports both price stability and growth."
