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No rate cut before IMF/EU deal, CPI pressure to still block rapid easing

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Hungary's central bank is unlikely to embark on any easing cycle before a deal on a new financing package with the IMF and the EU is secured, and inflation pressures are likely to prevent the MNB cutting its interest rates rapidly even then, London-based emerging markets analysts said after the Monetary Policy Council had left the policy rate unchanged at 7.00% at its Tuesday meeting, in line with consensus forecasts.

Analysts at 4cast, a major London-based financial consultancy, said after the rates decision that the MPC eliminated a reference that was present in the minutes of the previous meeting suggesting that inflation should be in check in 2013. Also, Governor András Simor said the MPC will need more time to assess the inflation impact of the new convergence package "but upside risks have clearly risen ... this indicates that the time when the (CPI) target will be reached will likely shift further out, potentially to 2014".

Overall, inflation risks are rising and this should prevent a quick rate cut "even if the breakthrough with the EU/IMF talks indeed takes place in the coming days or weeks as PM (Viktor) Orbán said today (on Tuesday in Brussels)".

"We still see rates unchanged for a prolonged period and we expect no rate change this year", 4cast's analysts said.

London-based analysts at JP Morgan said they continue to see the MNB on hold until an IMF/EU deal is concluded and the risk premia on Hungarian assets decline on a sustained basis.

"In our base case a deal could be concluded already in the next three months, although risks of a delay are significant ... If an IMF/EU deal is concluded, we think the MNB could have scope to cut rates 50-100bp", JP Morgan's economists added.

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