As a result of the deceleration of inflation in November as well as global developments, the National Bank of Hungary (MNB) is not forced to take any step towards monetary tightening just yet therefore it will not change interest rates at its next policy meeting on Tuesday, analysts polled by Portfolio agreed. The views are not so uniform, though, when it comes to estimates as to how long the MNB can put off a rate hike. Some think that it should step on this path - and raise the base rate - as soon as the end of next year, while others believe the base rate will still be at its current level (0.9%) even at the end of 2020.
The Central Statistical Office (KSH) published the consumer price index for November last week, causing quite a surprise, as the headline figure decelerated a lot more than expected to 3.1% from 3.8% in October.
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The slowdown triggered mainly by dropping oil prices came in handy for the MNB, as the accelerating price index over the last few months started to put the central bank in an awkward position. The bank has been stressing for months that its inflation target (3.0% +/-1ppt) is not in jeopardy therefore maintaining loose monetary conditions is warranted, despite the fact that most of the central banks have already started tightening or has started to edge towards tightening.
However, as the top of the tolerance range got closer, the MNB had an increasingly difficult job to (credibly) defend its inflation scenario. It was losing the credibility battle if you like. Last week’s CPI print brought a turnaround in this respect.
Although the drop in the price of oil did buy the MNB some time, measures of underlying inflation do suggest a mounting price pressure therefore the MNB will not be able to put off much longer the (slow) surrendering of its monetary policy stance.
Analysts polled by Portfolio all expect the Monetary Council to leave interest rate conditions on hold on Tuesday. Yet, this is definitely not a non-event, considering that the MNB will publish the main figures (GDP, CPI) of its new Inflation Report that could serve as guidance to future monetary policy.
The time for a change has still not come. Not to mention that the MNB can now feel particularly at ease versus the markets, as it was proven right holding its ground for the headline inflation figure dropped to 3.1% while core inflation remains below 3.0%. At the same time, the changes lurking behind the main numbers clearly suggest to me that a monetary policy turnaround and a raise to the overnight deposit rate are inevitable in 2019
, commented Péter Virovácz , analyst at ING Bank in Budapest.
Dániel Módos , analyst at OTP Research, noted that due to the recent volatility on financial markets, the trade war, the uncertainties surrounding the Fed’s monetary policy, the deceleration of inflation, the stability of the Hungarian forint, and the drop in yields on long-maturity government bonds the MNB will not move towards tightening just yet, and it will not change the main messages of its rhetoric, either.
Gábor Regős, analyst at Századvég, also pointed out that the diminished price pressure could help the bank maintain loose monetary conditions persistently therefore tightening could rather take place in tandem with the ECB, in the second half of next year.
Most of the analysts in Portfolio’s poll believe that the 0.9% base rate will be left on hold throughout 2019. The first step towards tightening will be a gradual reduction of the cap on FX swap tenders, and a hike to the O/N deposit rate in parallel with the expectedly rising interbank rates. In this regard, Orsolya Nyeste , analyst at Erste Bank in Budapest, emphasised that the normalisation process will likely be extremely slow. Her bank believes that the 3M BUBOR rate will not reach the level of the 0.9% base rate even by the end of next year.
Ágnes Halász , analyst at UniCredit Bank in Budapest, stressed that according to UniCredit Group’s global outlook, the Federal Reserve will put a stop to its current rate hike cycle next year, and will start to lower rates in 2020. In the meantime, the slowdown of economic growth in the Eurozone, ebbing global trade, and the worsening outlook on the USA will force the Fed to hit the breaks hard, due to which the European Central Bank will not hurry with tightening, either. And this will give the MNB (as well as other emerging market central banks) a bit wider wiggle room. Subsequently, the possibility cannot be excluded that the Hungarian base rate will be right where it is now even at the end of 2020.
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