Economy 26 February 2019, 4:57pm

INSTANT VIEW - Hungary cenbank leaves door wide open for tightening

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In line with the market consensus, the Monetary Council of the National Bank of Hungary has not modified either its main policy rate or the overnight deposit interest rate. Other monetary conditions and tools remained unchanged too.

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Morgan Stanley, CIB Bank.

Pasquale Diana, Morgan Stanley, London

“The NBH kept rates on hold, as universally expected. This was a non-projection meeting, and therefore we were mostly looking for any sign that the NBH may have turned more cautious. However, the statement largely repeated what it said in January.

“The only small changes referred to more favourable sentiment in international risk markets, and to Hungary's recent upgrade from BBB- to BBB by both Fitch and S&P. However, the key drivers of policy normalisation, namely "persistent inflationary developments", were unchanged.

“Barring large surprises in the data, the stage seems set for the NBH to at last begin withdrawing some monetary stimulus, starting with the March 26 meeting. Assuming that normalisation takes place at a 15bp clip a quarter, it will only be in 1H20 that the difference between Bubor and the base rate (90bp) is absorbed."

Sándor Jobbágy, CIB Bank, Budapest

“The interest rate decision (and the unchanged other monetary conditions) did not arrive as a surprise to most market players, despite the fact that comments from the NBH vice-president on normalisation (highlighting the importance of tax-adjust inflation moving reaching 3% in a lasting manner) triggered significant forint appreciation, breaking through the EUR/HUF 320 level.

“In our own preliminary research, we assessed that core inflation (3.2%) and tax-adjusted core inflation (3.0%) reaching target levels warrants caution, but for specific monetary actions further statistics is needed that confirm the persistant nature of the core processes.

According to today’s MC statement: “In terms of the outlook for domestic inflation, the probability of core inflation excluding indirect tax effects capturing persistent trends rising above 3 percent has increased, while loose monetary conditions in the euro area may remain for a longer period of time. The main factor among these, determining the MNB’s monetary policy decisions, is developments in persistent domestic inflationary trends."

“I.e. the central bank’s communication matched that of the January statement and confirmed December’s guidance regarding the higher weight of domestic inflation in monetary decision making compared to the weight of the ECB’s interest rate policy.

“Following the unsurprising fundamental and market view, the main conclusion (also unchanged compared to January) also highlights the importance of the underlying persistent inflation trends:

The Monetary Council is prepared for the gradual and cautious normalisation of monetary policy, which will begin depending on the persistent inflationary developments. Core inflation excluding indirect tax effects is likely to continue to rise in the coming quarters, which the Council will assess in terms of the sustainable achievement of the inflation target. In the period ahead, therefore, incoming data will be of key relevance. The Monetary Council closely monitors incoming macroeconomic data and will decide to adjust monetary conditions depending on their outcome.’

“All this does not reflect a stricter stance compared to the guidance given in December and confirmed in January. In view of the February MC-decision and related statement, our unchanged view is that the timing of the normalization moves depends on incoming new information about the evolution of inflation. Should core inflation figures appearing at the beginning in March arrive at or above 3% again, an announcement on stricter policy (with lowering the available liquidity) could arrive together with the publication of the new Inflation Report and the updated staff forecasts in March.

“At the first stage of the normalization process the central bank may influence market liquidity conditions (in line with the MT statement) to push BUBOR rates higher. In the next phase or parallel with this the NBH will likely adjust the interest rate corridor (an increase of the O/N depo rate is likely). We do not foresee a base rate hike this year.

“Therefore, we expect a slow, but steady upward trend in Bubor rates during 2019, but 3M Bubor is likely to remain well below the 0.90% policy rate."

In an initial reaction the exchange rate of the forint did not show major shifts. The EUR/HUF cross rate hovered close to the 317 level.