Analysts warn of rising pressure on Hungarian c.bank to make more aggressive rate hikes
The MNB raised its key policy rate by 15bp to 1.80% at its Tuesday session, in line with analysts’ consensus, and also raised the interest raise corridor by a like amount to between 0.85% and 2,75%.
In an analysis of the decision and the statement released after the session, emerging market analysts at Morgan Stanley highlighted that while the amount of the rate hike was unchanged, forward guidance was more hawkish than before.
First, the statement continued to focus on inflation risks with the central bank flagging that risks may be "more persistent" than previously thought. Second, MNB deputy governor Barnabás Virág commented that the tightening cycle will continue into 2022.
Morgan Stanley maintains its call for two more 15bp hikes in the fourth quarter of 2021, as inflation pressures remain to the upside on the back of higher energy prices and their possible spillover to core inflation through industrial goods prices.
The bank continues to see risks to its call being skewed to the upside, with a one-off 30bp hike in November being possible as 12-month inflation is likely to approach 6% for October.
Moreover, the tight labour market and the government's plan the implement a significant public-sector and minimum wage hike in 2022 are creating risks for the hiking cycle to extend into the first quarter of 2022, the analysts added.
In its forecast on emerging markets released late on Tuesday, London-based global financial and economic analyst Capital Economics also said
the pressure on the MNB for more aggressive monetary tightening is increasing.
However, it foresees the Hungarian central bank continuing to make 15bp hikes, with the base rate expected to rise to 2.40% by the beginning of 2022.
Capital Economics also sees market concerns that the MNB’s monetary policy is not aggressive enough given the current inflation environment, especially since it slowed its initial 30bp monthly hike rate to 15bp.
The analysts expect 12-month inflation in Hungary to rise above 6% in November and to remain above the central bank’s tolerance band until late 2022, longer than currently forecast by the MNB.
Other London-based analysts see lower inflation risks.
Emerging market analysts at the London research arm of Bank of America, BofA Global Research, said in their latest report on the CEE region’s inflation outlook that inflation in Hungary could slow after the fourth quarter of 2021.
According to BofA Global Research, it would be favourable for the Hungarian forint if the MNB were to shift emphasis within the tightening cycle from interest rate policy to adjusting its quantitative easing operations, seeing as current account trends have taken a turn for the better,
Nevertheless, analysts expect the MNB’s policy rate to reach 2.10% by the end of this year and 2.70% by the end of 2022.
“The Monetary Council’s statement was hawkish, and we think it boosts the probability of a larger hike in November – we pencil in 30bp. And more tightening is on the way in December and 2022, in our view. We view the forint as too weak and recommend a short EUR/HUF position,” Societe Generale said after the rate hike.
SocGen foresees a 30bp hike in November. It expects Hungary’s inflation to accelerate to 5.7% year on year in October, 6.1% in November and 5.9% in December, with upside risks to these figures. “These factors are likely to result in the MNB delivering a larger rate hike in November,” SocGe said, adding that it expects a 15bp hike in December, with the base rate reaching 2.25% by end-2021. In 2022, it expect 100bp more of rate hikes and the base rate to reach 3.25%.
“Based on the hawkish tone of the statement of the council and the comments of the Vice Governor, while we continue to predict the policy rate at 2.1% for the end of this year, we have put out rate forecast for next year under revision,” Orsolya Nyeste, analyst at Erste Bank in Budapest, said.
Cover photo: MTI/EPA/Neill Hall
