City: 2009 CPI target “becoming out of reach”


Hungary’s central bank is set to continue its tightening cycle with potentially aggressive further rate hikes as hitting the 2009 CPI target still seems doubtful despite the very strong forint, London-based emerging markets analysts said on Tuesday.

The MNB raised its policy rate by a widely expected 25bps to 8.50% on Monday. Following the Bank Holiday Monday in the UK, Goldman Sachs said in its comment released on Tuesday it expects that energy prices will continue to move upwards, which will put pressure on inflation in 2009, despite the strengthening forint. “We think that the goal of achieving the 3% inflation target by 2009 is looking increasingly out of reach”.

It said its CPI forecast, revised up after the recent increase in its oil price forecast, is that inflation in Hungary will decline only to around 4% by the end of 2009, even though the forint is expected to strengthen further. “Our expectation is, that the Monetary Council will hike interest rates by another 50bps from the current 8.5% ... This is not priced by the market, which is expecting flat rates from here .... Our main scenario is that the hikes will happen in the next three months, but the strengthening of the forint may delay the hikes”, Goldman Sachs said.

In a separate comment, Dresdner Kleinwort said, the hawkish rhetoric and the cautious forecasts, that followed the rate hike “are a welcome move”. It said it maintains the view that the MPC will stay on a wait-and-see stance in the coming months to assess the speed of the disinflation process, the global environment and the developments in food and energy. Another 25-50bps tightening are likely during the course of the year if cost shocks deteriorate or if the domestic political environment were to suddenly deteriorate, triggering renewed investors’ risk aversion. However, “we expect a large monetary loosening to start from early 2009”, Dresdner added.

Before the MNB’s move on Monday, eight of the nine major City-based forecasting think-tanks and investment banks polled by Econews - Deutsche Bank, JP Morgan, Credit Suisse, UBS, Goldman Sachs, Merrill Lynch, Dresdner Kleinwort, Barclays Capital, 4cast - called for a 25bp hike.

Only Merrill Lynch said, that the rate hikes so far, combined with a soaring forint and a still weak economy, have already led to a significant tightening in Hungary’s monetary conditions. (MTI-Econews)

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