Time approaching to take profits from Hungarian assets

Seeing no inflationary pressures, but favorable outlooks for growth and still plenty of unused potential in the economy, the National Bank of Hungary’s Monetary Policy Council reduced the central bank base rate by 20 basis points from 3.60% to 3.40% at its October meeting.

The cut came fully in line with market expectations and consequently caused muted market reaction and the indication is that there is no stopping just yet.

“In the Council’s view, considering the outlook for inflation and the real economy and taking into account perceptions of the risks associated with the economy, further cautious easing of monetary conditions may follow,” the statement accompanying the announcement said.

The country’s risk environment and CPI trends appear to allow the central bank to carry out two more 20 basis point cuts this year, something that is also supported by the dovish wording of the statement, London-based emerging markets analysts said.

Analysts think that the reasons for the central bank to call it quits in terms of continuing the cuts are stacking up, such as economic growth and rising core inflation, not to mention the risks.

“It’s not clear that rates can be lowered much further without causing the forint to weaken, particularly in the context of the growing risk of a flare-up in tensions between the government and local banks,” Capital Economics senior regional analyst William Jackson said in comment.

Economists at London-based financial consultancy 4cast agreed that the 3% mark is the bumper that will convince rate-setters to stop, but this also assumes the continuation of the favorable international mood. Any improvement, and there is a chance the indicator could go below the mark.

“We do not find it very likely at the moment that they would stop cutting rates before the 3% mark is reached,” 4cast analysts said.

Time to cash in
In contrast, there are also opinions that the supportive global ambient is quickly petering out, something likely to send Hungary assets sliding.

“In our opinion, the base rate will start to increase again next year while the euro-forint exchange rate will surpass 300, which is why it is advisable to realize the yields achieved with Hungarian assets within this year,” István Horváth, investment director at K&H Alapkezelő said in a note.

There are also lingering concerns about the eventual impact on the financial sector from the government’s next measure to phase-out foreign currency mortgage loans. Economy Minister Mihály Varga announced that a relief package suggested by the Hungarian Banking Association isn’t acceptable to facilitate the goals laid out by the government and that the cabinet will launch a measure of its own making.

“It remains very difficult to provide any meaningful cost estimates given the degrees of freedom at play,” Nomura analyst Peter Attard Montalto said, envisioning further serious losses for the banking industry and potential further involvement from the central bank and its reserves.