Hungary c.bank not to stop with rate cuts yet - Portfolio.hu Poll

This month will be the ninth in a row when the MPC takes the benchmark policy rate lower, the market forecasts. The size of the reduction will be 25 bps again that will take the base rate to an all-time low of 4.75%.

The market is pricing further 100-bp monetary easing on a 9-month horizon, at least FRAs indicate that, according to analysts.

The key sentence on the bias of the MPC from the February minutes was the following: "The Council will consider a further reduction in the policy rate if the medium-term outlook for inflation remains consistent with the Bank's 3% target and the improvement in financial market sentiment is sustained."

This was replaced by the following: "The Council will consider a further reduction in interest rates if medium-term inflationary pressures remain moderate and the uncertainty surrounding financial market developments diminishes."

“The change implied that unlike in previous months, as far as financial market developments are concerned the maintenance of the status quo would not be sufficient for further cuts. The MPC clearly stated that it needs to see improvement before cutting further," commented Gábor Ambrus, strategist at 4Cast in Sofia.

Regarding inflationary pressure we have learned since then that the yr/yr CPI dropped to 2.2% in March from 2.8% in February. The medium-term inflation outlook is also consistent with the bank’s 3% inflation target. (In the Report on Inflation published in March the NBH projects 2.6% CPI for this year and 2.8% for 2014.) As for the market environment, the forint appreciated by nearly 4% versus the euro since the end-March policy meeting, coming lower from north of 300, and government securities yields also dropped sharply.

“Due to the weaker than expected US payrolls figures, and in particular due to the significant BoJ policy measures, the global hunger for carry has strongly increased and ‘great rotation’ theories have been shelved," Ambrus noted.

As a result 10-year HGBs currently trade at 5.56%, some 70bp lower than prior to the last rate setting meeting. Hungary’s 10Y USD denominated CDSs have come down about 55bp since the last meeting. The strategist noted that locally the much better than expected ESA budget figure for 2012 (2% of GDP) added support to sentiments, also reducing the risks of conflict with the EU. He thinks that these factors alone should be enough for the MPC to continue the easing cycle.

György Kovács, analyst at UBS in London changed his call to 25bps rate cut in April from an on hold decision projected earlier, seeing rates falling to 4.25% in coming months.

He has previously highlighted that if financial conditions turn more favourable there would be scope for additional monetary easing in Hungary. As a reason for changing his call Kovács also cited the strengthening of the forint and the tumbling of inflation.

Gergely Gabler, analyst at Equilor in Budapest believes the bottom of the rate cut cycle could be at 4.00% which may be reached by the end of this year. Investor sentiment towards Hungary has greatly improved over the past month, which may be an even stronger argument for the MPC than inflation to keep lowering the base rate, he said.

“With both financial market conditions and the economic outlook pointing towards a cut, we expect the NBH to keep trimming rates by another 25bp in April. Further cuts should follow and we think the MPC will be moving towards a lower end of the cycle than previously anticipated - we think the bottom could be in the 4.00-4.50% range," Ambrus projected.

Further monetary easing domestically but also in Japan for instance have contributed to creating a favourable environment. We are still feeling the impact of the positive correction that has been taking place since the BoJ stepped up monetary easing (i.e. global risk appetite has improved), commented Sándor Jobbágy at CIB. At the same time, he believes that end of the rate cut cycle in Hungary is near, as the MPC is mindful of risks stemming from a possible negative turn on external markets. From this aspect, a base rate below 4% could be highly dangerous, he warned. Among other factors it is the fluctuation of Eurozone risks that warrant cautious rate moves in the future.

This time the local market is pricing a 50bp cut and while this would be a larger cut than the consensus envisages it still would not be a surprise. But cautious monetary policy voiced in the MPC’s communication make it more likely that only a smaller reduction will be delivered.

Péter Vizkelety, analyst at Fundamenta, is of a similar view, saying a 50bp cut may be discussed at the rate-setting meeting, but members should still proceed with caution. If monetary easing was to be accelerated the MPC may need to face a more difficult situation later on, especially if an unforeseeable (negative) change occurs in the now highly favourable external environment.

William Jackson, a London-based analyst at Capital Economics, says “Hungary’s heavy FX debt burden means the economy is still exposed to any deterioration in investor sentiment. Ultimately, we think this could force the NBH to reverse the easing cycle." He projects the base rate at 5.25% both for end-2013 and end-2014.

Annika Lindblad, analyst at Nordea in Helsinki, says “room for rate cuts remains limited, although the risks are clearly tilted towards one more cut in April due to the moderation in inflation and the slight strengthening in the HUF."

It is difficult to see where the rate cut cycle will bottom out, analysts at Erste noted. Over the past few weeks the market has started to price in a much lower base rate for end-2013 than before, which indicate a benchmark policy rate well below 4%. Erste’s analysts believe that these expectations are justified up to a certain point and the 4% base rate could be reached by the summer. But then the easing cycle could be suspended because the high external debt remains a major impediment to substantially lower rates and some attractive positive spread should be maintained, they added.

Not to mention that in view of NBH Governor Matolcsy’s 18 April interview (what has happened so far is only the beginning in the renewal of Hungary’s monetary policy, he said) concerns about the possible implementation of additional unconventional policy means could intensify and then uncertainties on the market may rise again.

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• base rate,
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