Hungary's central bank is fine for now, but could face dilemma later
From one quarter to another we are rebuilding our assessment of the economy and the inflationary situation, in which we heavily rely on the quarterly Report on Inflation. Looking forward, this means that monetary policy will be a series of individual decisions in the coming period
, MNB Deputy Governor Márton Nagy told Portfolio in an interview earlier this month.This sends quite a clear message that the real action (i.e. possible further interest rate hikes) should be expected at policy meetings that coincide with the release of the updated inflation reports. Although Hungary’s core inflation adjusted for the impact of indirect taxes, a key metric for the MNB, rose to its highest level in more than a decade in March, the central bank’s own estimates also project an acceleration in underlying processes, so in itself this would not make the MNB take another tightening measure. We will see only in the next few months whether the central bank is right about its expectation that from the end of the year onward, the external cooling effect stemming from the deceleration of the Eurozone will start to tame underlying processes (and require no tightening measure from the MNB).
In light of the above, each analyst polled by Portfolio forecast unchanged rates for tomorrow’s policy meeting.
Domestic inflationary pressure has clearly grown, while the perception of the international environment remains unchanged therefore the probability has increased that the central bank will continue its cautious tightening in June, unless data coming in until then will show a different picture than they currently do. We do not expect any meaningful action by the MNB on Tuesday, particularly as it stressed earlier that major decisions should be taken every three month, in parallel with the publication of the Report on Inflation, i.e. the central bank is in a data-driven mode. We believe that the main messages of its statement will also remain unchanged
, commented Dániel, Módos analyst at OTP Research.Orsolya Nyeste, analyst at Ertse Bank in Budapest, thinks that the MNB continues to believe that factors driven by domestic processes (wages, robust consumption) pointing to higher trend inflation will be offset in the following months by lower imported inflation, and that this will allow the central bank to carry out normalisation at a relatively moderate pace. Apparently, the external environment, including the policy of the largest central banks will be supportive, she added.
In light of the above, not only the April but also the May policy meeting is likely to be a non-event. Moreover, I do not expect major changes to be made to the press materials, either. The MNB is likely to keep stressing that due to duality (inflation-enhancing internal risks, and inflation-reducing external risks) it should apply a wait-and-see approach
, he said.Mariann Trippon, analyst at CIB Bank, also underlined that in view of the MNB’s previous communication, the June policy meeting could be of key importance. If incoming data warrant intervention, monetary conditions could be modified primarily by a further reduction of market liquidity.
Ágnes Halász, analyst at UniCredit, highlighted the major uncertainties surrounding future rate decisions, pointing out that the inflation trajectory - both the headline index, core inflation and core inflation adjusted for indirect taxes - reached a point from where the direction of the next changes could be a watershed. She believes that the probability of Hungary’s inflation shifting to a higher gear than previously anticipated has increased, and in that case the MNB could be facing a dilemma:
It will either take the necessary steps towards monetary tightening in order to maintain its credibility, or it will stick to supporting economic policy and fiscal objectives relating to maintaining GDP growth and to debt financing.
Presently, we believe option two is more likely, i.e. the central bank will try to maintain the current ultra-loose monetary conditions at least until the end of 2020.
As a result, the baseline scenario for Halász is that the MNB will not alter rates this year, either the base rate or the O/N deposit rate. Most analysts polled by Portfolio watered down their rate hike expectations after the March policy meeting, but several of them still believe the bank would need to raise the O/N depo rate further. There is no disagreement, though, that this will not happen tomorrow.
