The strengthening of Hungary’s forint and the abatement of financial stability concerns over the past three weeks have apparently eased the rate-setters’ minds at the central bank (NBH) quite a lot. The Monetary Council has broken its tightening cycle on Tuesday, which was started in November, leaving the benchmark interest rate unchanged at 7.00%. The decision was most likely a close call, supported by new MPC members, given that there were a number of valid arguments also for a further increase in the base rate.
Reacting to the surprise rate call, Hungary's forint depreciated immediately by easing some 1.5 units versus the euro, to 303.20 from 301.70. Against the USD and the Swiss franc it weakened to 233.50 and 251.50, respectively.
The outcome of today’s policy meeting is different from the market’s call (a 50-bp hike both in a Portfolio.hu and a Reuters poll), while expectations on monetary tightening have lessened lately. The forint continued its considerable appreciation over the past few days and risk premia also decreased, which have already convinced several investors that today’s monetary tightening could be more moderate, i.e. 25 bp. In this regard, today’s rate decision is indeed a surprise.
Seeing clearly in the current situation is not easy. On the one hand, the country’s risk indicators did drop substantially. On the other hand, these are still weaker than at the time of the previous rate-setting meeting in December 2011.
The reference yield on the 10-year benchmark bond, for instance, is still 30 basis points higher than it was a month ago and that on the 3-yr bond exceeds the 20 Dec level by 88 bps, while the yield on the 5-yr Eurobond is 46 bps higher. The country’s CDS spread was up 21 bps at yesterday’s market close than a month ago. Overall, while Hungary’s financial stability situation improved in the short term (thanks to more upbeat expectations on the money market about the government’s chances of striking a bailout deal with the IMF/EU), but the indicators have not fully recovered from their previous deterioration yet. EUR/HUF is almost exactly where it was around the last rate meeting, hovering around 300, just like before Christmas.
The Monetary Council’s decisions are presently much more influenced by financial stability considerations than the outlook on inflation. Hence today’s rate call was affected only to a smaller extent by the fact that Hungary’s consumer price index retreated some in Dec11 and that the growth outlook has failed to improve.
We will know more about the reasons behind today’s decision from the MPC’s official statement to be published at 15:00 CET and from a press conference to be held by NBH Governor András Simor (starting at the same time). You should also keep your eyes and ears open for any indication on future interest rate policy.
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