How unorthodox Hungary's c.bank will be at Sept rate cut? - Portfolio.hu Poll

The MPC switched to unorthodox monetary easing last month after NBH Governor György Matolcsy announced at a press conference in July that rate reductions could continue at smaller steps than usual. After 12 consecutive cuts of 25bp each the MPC lowered the key policy rate by 20bps in August, against the market’s call for a 10bp easing. Analysts, however, did not have an easy job, so lacking a better guidance they were leaning on odd remarks from NBH officials, so the outcome of the Aug policy meeting was a surprise.

Then expectations showed even bigger divergence. In the current poll analyst projected a rate cut of 10, 15, 20 and 25 bps too, but the majority expects a 20bp reduction.

Mariann Trippon, analyst at CIB Bank in Budapest, believes macroeconomic data released over the past month do not provide a reason to change monetary policy. The second-quarter GDP data and other indicators published since then show moderate pickup but recovery remains lacklustre. In the meantime, inflation hit a new record low in August (and it will drop further courtesy of the reduction of utilities tariffs). Although this was attributable mostly to one-off effects, the record low CPI, the lack of inflationary pressure on the demand side and the high likelihood that the inflation target will be reached also in 2014 can provide sufficient argument for the dovish MPC to trim the base rate further, Trippon said. Also note that remarks by Matolcsy and Deputy Governor Ádám Balog already made this scenario likely. Balog had even hinted that a 10-20bp cut could be expected.

The U.S. Federal Reserve, however, apparently solved the dilemma whether the 3.80% base rate should be lowered by 10 or 20 basis points. Putting off the tapering of its asset purchases strengthened risk appetite and that exerted a favourable impact on local markets too, Trippon noted. On the whole, both fundamentals and Hungary’s risk perception point to the direction of the MPC voting for a “bold" 20bp rate reduction in September, as well, she added.

The rhetoric by NBH officials indicate it rather clearly that the MPC wants to push the base rate as low as possible and in as short time as possible. The rate path of the remaining months this year will depend on how the country’s risk perception turns out, considering that no serious change in fundamentals can be expected, Trippon said. If global sentiment does not turn drastically worse and country-specific factors (e.g. next year’s budget, FX debtor relief programme) do not lead to serious forint depreciation there is a realistic chance that the benchmark policy rate will be reduced to below 3.50% by the end of the year, she projected.

Raffaella Tenconi, a London-based analyst at Bank of America Merrill Lynch said in a research note earlier this week that risks have increased for an earlier than expected end to the interest rate cutting cycle, but these have not yet led her to change her forecast of further easing to 3.25% by year-end from 3.80%.

She continues to expect the Monetary Council to maintain a dovish bias due to the benign inflation outlook, but noted that this needs to keep in external conditions in consideration.

Peter Attard Montalto, strategist at Nomura in London, said that “with the Fed decision and benign domestic backdrop now the FX mortgage issue has been kicked out there is no reason not to go 25bp."

“The way we get to the base is irrelevant, they still want to cut as much as they can possibly get away with so we still view rate bottom at 3% and see inability to hike next year," he added.

Gábor Ambrus, analyst at 4Cast in Sofia, noted that after switching into lower gear in August the MPC still gave no indication that the easing cycle would be nearing its end. At the July rate setting meeting Governor Matolcsy said that the bottom of the base rate could be in the 3.00-3.50% band - Ambrus thinks it is still more likely that the MPC will aim at the lower end of the this range.

Recent data gave further support to monetary easing, he noted, mentioning the Aug CPI (dropping to 1.3% yr/yr from 1.8% in July, well below expected with a very tame transition from the increased tobacco retail margins to consumer prices) and the 11.1% reduction in gas, power and heating prices, to be in place from mid October or early November.

“This should knock CPI to well below 1% in the last month of the year. The cuts in regulated prices should ensure a very subdued CPI path for the next 4-6 quarters and the persistently negative output gap shows the same. The labour market also remains supportive to disinflation, with neither employment nor wage figures indicating that labour market conditions would be tightening," Ambrus said.

“The real threats to the rate path are still mainly stemming from global EM wobbles but we would need a sharper and more lasting impact on both bond and FX markets for the MPC to alter its planned policy course, especially since market sentiments towards EM markets have improved, once dovish Yellen had become the most likely successor to Fed Chairman Bernanke and as the Fed opted to keep asset purchases unchanged in September, despite widespread tapering expectations. These factors have opened up the room for the MPC to cut further," he added.

All in all, he expects the MPC to deliver another 20bp cut next week, noting that “there are minor risks for a smaller cut of 10-15bp and that rates are likely to ease further in the coming months.

Gergely Gabler, a Budapest-based analyst at Equilor also believes that the MPC will remain in an easing mode until the end of the year. Assuming an unchanged pace of cuts he believes the rate cut cycle could go to 3.00% by year-end, but he also thinks that it could bottom out just there too, as indicated by Matolcsy. Gabler does not expect additional rate reductions in 2014.

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