Analysts: MNB to cut 20 bp, may not stop easing at 3%

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Hungary's central bank is all but certain to carry out another 20 bp interest rate cut this week and is increasingly likely to bring its policy rate below 3% by the end of its current easing cycle, London-based emerging markets analysts said ahead of Tuesday's monetary policy meeting.

Economists at JP Morgan said that while their base case is that the MNB will stop cutting at 3%, the risk of rate cuts to below 3% has risen in recent weeks on the back of a major CPI surprise on the downside in October and benign market conditions. Assuming the MNB keeps cutting until inflation turns, the policy rate could fall as low as 2.60%-2.80% in the first quarter of 2014, they added.

Analysts at Royal Bank of Scotland (RBS) said they foresee a drop in headline inflation of about 1% from the latest utility price cuts. Given where headline inflation is at the moment, “we believe Hungary is very much at risk of deflation.”

Economists at Barclays stressed that during the past 15 months, the MNB has cut its policy rate by a total of 360 bp. However, headline inflation has declined by more, falling 510 bp to 0.9%, well below the MNB's 3% target, “providing the bank with ample reason to keep the cutting cycle going.”

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