Hungary cenbank throws stone in pond with eyes on ripples
Policy meeting all at once becomes exciting
Up until early next week the general expectation was that the Monetary Council’s policy meeting in May will be eventless, given that the new Report on Inflation is not due until June, and the jump in inflation in April in itself does not warrant a reaction by the central bank, either. That is why Deputy Governor Barnabás Virág’s remark last week caught everyone by surprise, as he said a rate hike could be contemplated as early as June.
This comment has led to an immediate revision of prognoses. Most analysts do not expect a hike on 25 May, but in the longer term everyone expects a tightening in monetary policy. For year-end the market currently projects the base rate to be raised to 0.9% from the current 0.6%), and the 1-week deposit rate to be changed to 0.9% from 0.75%. And further hikes in both are forecasted by the end of 2022.
A single analyst in Portfolio’s latest survey believes the base rate will be raised now, but everyone shares the view that the next move will tighten monetary conditions. In view of what Virág said, such a projection carries very little risk, though.
The market is also in agreement that the first move could be a raise to the base rate, and – as odd as it may seem – this would be less painful for the MNB. The 1-week deposit rate has been 15 basis points higher since September 2020, which means that a symbolic hike to the base rate
would not be a rate hike in practice.
After the May meeting, the MPC could give a more detailed explanation for the upcoming monetary policy turnaround, and we could also gain more information whether in the current framework this would be a change to the base rate or the 1w depo rate, and whether or not it’s a well-founded expectation that the former will become the benchmark as it is brought to the same level with the latter, commented Orsolya Nyeste, analyst at Erste Bank in Budapest. She thinks the main question here is whether this will be the first step I na rate hike cycle or the Council will be content with a single move. We might know more in this respect, as well on Tuesday.
Apparently, the MNB is going to switch from a reactive mode driven mainly by the freefall of the forint into a proactive control
, commented Ágnes Halász, analyst at UniCredit in Budapest, who is the only one in our poll that forecasts a rate hike for this Tuesday.
Why does the central bank have to react now?
Virág’s remarks came out of the blue because rhetoric used by the MNB recently did not spell out tightening. The forint has been firming for a few weeks now and the long-term inflation outlook has not deteriorated either. Although the 5.1% yr/yr CPI exceeded expectations but it would be premature to call this a persistently high inflation. The MNB was also stressing before that inflation could temporarily surge to around 5.0% in the spring.
Consequently, tightening in May would seem unjustified, unless the bank sees some red flags in the April inflation and has concerns that the long-term CPI course could be in jeopardy.
Halász says the main issue right now for the MNB could be if the jump in inflation was indeed a fluke or not. She does not think it was, as too many factors at once have been driving prices higher
and the MNB does have reasons to be concerned.
The well-formed rhetoric and the considerable strengthening of the forint it triggered make it possible for the MNB – in accordance with its official statements – to hold its breath until June and the release of the next Inflation Report. From our part, we expect several smaller, more cautious steps from then onward, said Péter Vizkelety, economist at Fundamenta.
Gábor Regős, analyst at economic research institute Századvég, thinks the MNB should hold on until the May CPI print that could contain crucial information about the price increases relating to the re-opening of the economy. He has also mentioned the publication of the Inflation Report in June. Inflationary developments will likely warrant tightening, which assumption is also underpinned by the outstanding first-quarter GDP data and the expansive budget planned for 2022.
We believe the rate hike will be small, and monetary policy will remain loose, only not so ultra-loose
, he added.
It’s a forgone conclusion that we’ll see Barnabás Virág’s words in the post-meeting statement [of the MPC] on Tuesday, said Péter Virovácz. For the first time in a long time, we can expect a solid and unequivocal forward guidance that will hopefully set the framework for the rate hike cycle, thus further increasing transparency, added the analyst at ING Bank.
Virovácz thinks that after a rate hike in June the MNB will proceed with small steps, as “in case of a robust, front-loaded cycle beyond the market’s expectations could the forint could gain a lot. Considering that a massive inflation gap will come to pass between Hungary and the euro area this year as well, a further marked appreciation of the forint versus the euro would make the HUF even stronger in real terms, substantially worsening the country’s price-competitiveness,” he concluded.
Cover photo: Shutterstock
