Economy 17 June 2021, 11:10am

Hungary central bank may raise rates to 1.0% next Tuesday - Morgan Stanley

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The National Bank of Hungary (MNB) is to realign the base rate and the 1-week deposit rate by raising both to 1.0% next Tuesday (22 June), Morgan Stanley projects in its latest research note. It believes that the biggest risk for the forint is if the central bank disappoints investors.

The market has been waiting for a clearer picture on the rate of the central bank's upcoming rate hike, as the Monetary Council signalled in May that only the speficics of the tightening were left to be clarified. Several central bankers have made it clear over the last few weeks that a rate hike cycle is to start on 22 June for the first time in a decade.

Barnabás Virág, Deputy Governor of the MNB, said last week it would be a "meaningful" hike, i.e. the realignment of the base rate with the 1-week deposit rate is the most likely outcome.

Morgan Stanley projects that the base rate will be raised by 40 basis points to 1.00% and the 1-week depo rate by 25 bps also to 1.00%. The minimum that can be delivered is a 30bp hike of the base rate and a 15bp hike of teh weekly deposit facility, it added. MS economists also expect a subsequent 25bp rise in September.

"Such an outcome will have a more meaningful effect but likely be at the lower end of market expectations.Front-end FRAs currently price 3m Bubor close to 1.10%."

"Assuming a similar rate between the interbank rate and the weekly deposit facility as in the past few months, the market likely expects a hike of 40-50bp. Over the following months, the market is pricing a steeper tightening path even if we assume that the MNB delivers a hike every quarter as Pleschinger suggested."

MS economists continue to think that the MNB will announce the end of the two support programmes introduced during the pandemic – FGS Go! and BFGS, but that it will keep its QE purchasing programme in place "to mitigate potential volatility in the government bond market due to a change in global financing conditions or the potential resurgence of the pandemic in autumn this year."

They noted that the 1-week depo facility will not be completely scrapped, likely in order to continue to absorb the excess liquidity. They think "risks are that the NBH might consider introducing a mechanism to encourage banks to lend their excess liquidity to the real economy in order to avoid a sharp drop in lending activity as it retires its FGS Go! programme."

MS economists have pencilled in a 25bp hike in September, given their forecast for inflation to remain above the 3% annual target and close to the upper limit of the tolerance band for the rest of this year.

Morgan Stanely has also upped its GDP estimate for Hungary, projecting 5.7% growth in 2021 against 4.9% previously. Its 2022 forecast was left relatively unchanged at 4.4%.

The upward revision in our forecast means that the Hungarian economy will reach its pre-pandemic level in early 4Q21. We think that the MNB will also revise its current GDP growth forecast of 4.0-6.0%Y for this year while we think that 2022 looks optimistic at 5.0-6.0%Y, relative to our forecast.

MS noted that after inflation spiked in April to 5.1% yr/yr, the May CPI print remained elevated due to the still unfavourable base effects and higher fuel prices but also due to higher global goods prices starting to feed through to domestic prices. It expects inflation to start decelerating in June, with the biggest drop in July when favourable base effects are likely to help.

... but we still see headline inflation hovering just below the upper limit of the MNB's tolerance band while risks of sudden jumps in inflation due to mismatches between supply and demand in the hospitality sector will keep skewing the risk to the upside over the summer months.

MS economists think inflation will decelerate more materially in 2022 and even fall below the 3.0% target in the first half of next year, as the effects of the supply chain shortages and higher commodity prices disappear.