Forint down on deepening deflation

History

The forint was trading at 308.21 to the euro late Thursday on the interbank forex market, down from 307.03 late Wednesday. At 306.91 to the euro early Thursday, the forint moved between 306.68 and 308.26, a one-month low.

The National Bank of Hungary (MNB) will keep its record-low 2.1% base rate unchanged next week, a Reuters poll showed on Thursday, but some analysts see a growing chance of more easing next year due to recent price falls.

Fresh data out on Thursday showed deflation has deepened more than expected in Hungary in November, with core inflation nil again on the month and slowing on the year.

Inflation in Hungary is likely to stay low for an extended period, and this supports further rate cuts, a Barclays economist said. Barclays forecasts Hungary's 2015 inflation at 1.0%, well below the country's 3% target.

Citigroup also sharply reduced its inflation forecasts. Now it projects that Hungary's headline inflation will remain in negative territory until 2Q 2015 and accelerate to 1.8% by end-2015. "The monetary policy council may add some dovish tone to its statement in December but will likely wait for further evidence of

slowing core prices and certainty about the ECB's quantitative easing before delivering additional rate cuts," a Citi analyst said, adding that core-price moderation and falling oil prices increase the odds of additional minor rate cuts early 2015 and may postpone the beginning of rate hikes to later in 2016.

Meanwhile, Morgan Stanley expects Hungarian local-currency government bonds to trade sideways into year-end -- illustrated by poor demand for long government paper at the regular Thursday auction -- given the lack of an easing bias from the central bank, but they should outperform in early 2015, triggered by possible sovereign bond purchases at the ECB. November's deeper-than-expected deflation print increases the odds of interest rate cutting in early 2015, Morgan Stanley said. The house continues to have an overweight stance on Hungarian government bonds in its model portfolio.

The forint traded at 248.78 to the dollar, down from 247.18 late Wednesday. On Thursday, it moved between 245.63 and 249.01.

It was quoted at 256.58 to the Swiss franc, down from 255.28 late Wednesday. Its range on Thursday was 254.85 to 256.66, a more than one-month low.

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