City says: ERM-2 entry next year “not completely ruled out”

History

Hungary may join the ERM-2 pre-euro exchange rate mechanism as early as next year on the back of its improving fiscal position, and set a target date for adopting the euro a year earlier than the 2014 City consensus, although this is still not the likely scenario, a major London-based investment bank said on Tuesday.

In its daily New Markets report released in London, Goldman Sach (GS) said, it believes that Hungary is unlikely to join ERM-2 before the next elections, which are scheduled for spring 2010, since inflation remains high and Hungary “still needs to prove that the recent fiscal consolidation can survive an election”. Following up on a briefing by central bank (MNB) Governor András Simor and Finance Minister János Veres on an early draft of the national euro adoption plan, Goldman Sachs said its main scenario is that Hungary adopts the euro in 2014.

However, given the fiscal improvements, “we cannot completely rule out ERM-2 membership in (the second half of) 2009 and a euro target date of 2013”. GS added that despite the recent rally, it does not believe the forint is so strong as to trigger rate cuts in the short run, but the scope for further rate hikes is “diminishing”. Currently, “we are forecasting 50bps of additional hikes, but we expect the MNB to leave rates on hold for the time being”.

The market expects rates to stay flat at the current 8.5%, but the longer-term rate outlook depends on how permanent the forint appreciation will turn out to be, and how the inflation data pans out. Goldman Sachs said it expects the forint to remain strong, but also that inflation data “will not be very comforting”, leaving the MNB in a difficult situation. The MNB would be reluctant to swing from hiking to cutting in a short space of time, as it is worried about damaging its credibility if it were to cut in the face of high inflation data and forecasts, GS added. (MTI-Econews)

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