Economy 21 May 2024, 9:30am

EUR/HUF may soon hit 400 despite central bank caution - poll

Portfolio

The Monetary Council of the National Bank of Hungary (MNB) will stick to its half-percentage-point (50-basis-point) easing pace at today's policy meeting, according to economists surveyed by Portfolio. This will bring the base rate down to 7.25%, but the brisk rate cut pace is coming to an end. The market seems to have embraced the central bank's cautious approach and still expects a base rate of 6.5% by the end of the year. At the same time, analysts believe that even if the MNB hits the brakes on monetary easing, the EUR/HUF exchange rate will still go north of 400.

The base rate could be 6.75%-7% by mid-year, MNB Deputy Governor Barnabás Virág told Portfolio last week. Market participants share this view, according to our survey ahead of today's interest rate decision. The consensus is that a 50bp cut is now on the cards, and the vast majority expect a similar decision in June (with a minority expecting a 25bp cut), bringing us to the 6.75% rate at the end of the half-year.

We expect a decision, a 50-basis-point cut, that has already been carefully inspected from a communication point of view, said András Pintér, investor manager at Apelso Capital. He pointed out that the central bank has itself been preparing for more cautious easing pace in the recent period, as market expectations (especially for the end of the year) have exceeded the central bank's expectations. Of the options left (25 bps vs 50 bps), council members may opt for the larger cut in May, he noted, expecting a similar rate cut in June, in line with the consensus.

While inflation trends in market services may be a concern for central bankers, international developments in recent weeks provide the professional argument for such a move. Global risk appetite has stabilised after the brief risk-off in April, which is also reflected in the forint exchange rate, and this is perhaps the most important factor now, said Pintér. In his view, references to the approaching end of the rate cut cycle could play an even more prominent role in the post-decision communication.

Zsolt Becsey also draws attention to the short-term increase in the central bank's room for manoeuvre. According to the senior analyst at UniCredit, the removal of public frictions between monetary and fiscal policy is widening the room for monetary policy manoeuvre, but a really spectacular improvement in this respect has been brought by the recent weak US macroeconomic data. The US inflation and growth data confirm our expectation of three Fed rate cuts this year, which is supportive for emerging markets, including the forint, said Becsey.

A year ago the base rate was 13%, at the end of 2023 it was 10.75%, and the market expects it at 6.75% by the middle of this year, so we are witnessing a really dynamic period of rate cuts. This might lead you to think that the policy rate will be much lower by the end of the year, but as things stand, this is not the case. In fact, it is not an exaggeration to say that the MNB is expected to brake the monetary train almost to a complete halt, with the consensus forecast for December standing at 6.5%.

A number of factors, including the MNB's rhetoric, point in the direction that the end of interest rate cuts is near, says Orsolya Nyeste, senior economist at Erste Bank in Budapest. She has stressed that inflation will soon rise, market services inflation is still high and the need to keep real interest rates positive and manage this means that there is limited scope for interest rate cuts for the remainder of 2024. The focus will remain on the interest rate policies of the major central banks and regional central banks, which, together with domestic fundamentals (inflation picture, fiscal situation), will largely determine the room for manoeuvre of the central bank for the rest of the year. Most think it will be very small.

Given that I expect inflation to continue to pick up substantially in the second half of the year, with a peak of 5.5-6.0%, the June rate cut is expected to be the last in this series, said Péter Virovácz, analyst at ING Bank. In his view, the second half of the year could be a period of no change policy decisions. A significant pick-up in inflation, the inflationary stimulus from the expected fiscal adjustment (pass-through of tax hikes) and the monetary policy of the regional central banks could all prompt the MNB to be cautious and wait and see. However, if domestic and external developments are favourable, there could be perhaps another 50 basis points of further rate cuts in the system, said Virovácz.

Péter Koncz, an analyst at Századvég Economic Research, also pointed out that the central bank is constantly stressing the growing importance of imported inflation. This shows that maintaining exchange rate stability has become a priority in order to preserve price stability. Interestingly, despite this, analysts do not seem to have much confidence that the forint will remain stable over the next 12 months.

In this period, the consensus of forecasts suggests that

the euro could trade in the range between 383 and 409,

and there seems to be a near consensus view that the exchange rate will breach the 400 psychological barrier, based on individual forecasts. According to this view, the market believes that even if the central bank is cautious about cutting interest rates, yields that will eventually return to regional levels will not prevent a weakening exchange rate path.

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