Economy 27 January 2020, 10:36am

Hungary cenbank to make no move on Tuesday but it's getting there

Portfolio

The Monetary Council of the National Bank of Hungary (MNB) is to keep interest rates on hold at its upcoming policy meeting on Tuesday (28 January), but there are more and more signs that the MNB may be getting frustrated, analysts told Portfolio in a survey. The bank could be increasingly focused on both the consumer price index and the forint exchange rate, they say, but they do not expect the MNB to make a move just yet.

The MNB is to hold its first policy meeting of the year on Tuesday. Analsyts polled by Portfolio do not expect the bank to change monetary conditions this month. The earliest they project a rate hike is 2021, but only two out of the six respondents think the move will be made that soon.

Considering that domestic and foreign economic data continue to be in line with the central bank's prognoses made last December, we should not expect changes to be made to monetary policy, remarked Péter Virovácz. The chief analyst at Erste Bank in Budapest believes the main question is how the end-2019 EUR/HUF exchange rate and the dynamic wage increases affected the pricing decisions of corporates. The January CPI could cause a surprise from this aspect, but as the Central Statistical Office (KSH) is scheduled to publish it only in early February, the earliest the MNB could respond to that is next month, he added.

The earliest we should expect any change is in March when the MPC will have the latest Report on Inflation to rely on. Although inflation reached the upper end of the central bank's +/-1 percentage point tolerance range in December 2019, the January and February CPI prints will be crucial for the bank's March policy decision, stressed Gábor Regős, economist at think tank Századvég Gazdaságkutató.

Orsolya Nyeste, analyst at Erste Bank in Budapest, thinks the forint exchange rate is unlikely to be mentioned at the Tuesday policy meeting, but regardless of the rate-setting meeting, the fine-tuning of liquidity is likely to remain on the menu as a tool to influence the exchange rate and direct interest rates in the right direction. She believes the earliest rates could be raised is the second half of 2021.

The January and February CPI prints are expected to worsen the situation even further, because we project headline inflation to accelerate north of 4.0%. Consequently, forint weakening may be so extreme in February or March that the central bank will be forced to give a meaningful response to the crisis situation

, commented Ágnes Halász, analyst at UniCredit in Budapest.

She believes that the MNB will still be extremely cautious, and it will apply a temporary liquidity reduction or - in an extreme scenario - a shift in the interet rate corridor.

The ascending inflation trajectory could put the emphasis back on the MNB's monetary policy, but the global developments are not forcing the bank to tighten monetary conditions, says Ákos Kuti, analyst at MKB Bank. In his view, monetary conditions will be kept loose globally for a longer period than previously estimated. Consequently, he does not believe the MNB will apply considerable changes to current monetary conditions, either.

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