MNB wants to see FX debt early repayment impact before easing, says City

Rate cuts by the National Bank of Hungary (MNB) are not going to be likely so long as there is uncertainty surrounding the take-up rate of the FX mortgage repayment plan and its potential hit on banking sector profitability as well as the effects on the forint, London-based emerging markets analysts said.

In its latest weekly "Local Markets Mover" research note on emerging markets, BNP Paribas said that given the risks associated with the Hungarian government's new plan for FX mortgage repayments, "we think that there is a real risk that the MNB may have to resort to rate hikes in order to prevent an excessive weakening of the forint".

Also, there remains a risk that Hungarian subsidiaries of foreign banks could withdraw their operations in Hungary on the back of the mortgage plans, which could present further uncertainty around banking sector profitability and, in turn, credit lending.

However, there have also been some positive signals that "this worry may not materialize to the same degree as once thought", with Austria's Erste group revealing that it plans to "ring-fence" its Hungarian branch by increased provisioning and recapitalization, BNP Paribas said.

This commitment to maintaining its Hungarian business should provide some reassurance to investors and alleviate some of the pressure on Hungarian risk premiums. If there are more banks following the example of Erste bank, this is likely to be well received by the market, the report said.