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MNB on hold now, eyes IMF/EU deal for future rates guidance

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Hungary's central bank is all but certain to hold on to its 7.00% policy rate at its monetary policy meeting on Tuesday, and will focus on the IMF/EU financing package in its future rates decisions, potentially opting for more rate hikes if the talks suffer more delays, London-based emerging markets analysts said.


A firm consensus of rates on hold for Tuesday emerged in an Econews survey among major London-based investment banks and financial consultancies.

Economists at Goldman Sachs said that despite "little progress" in preliminary negotiations with the EU over a new financing agreement, there has been little deterioration in risks to the forint and external and domestic financing which is not enough to trigger a hike. But, at the same time, elevated CDS spreads, a weak forint and still very high costs of financing will prevent a rate cut.

Given the slow progress in negotiations and the government's reluctance to commit to a program, "we continue to think that the MPC will be forced to hike by 100bps this year to support the forint and reduce the risk of capital flight".

However, the supportive external environment which has so far dampened negative market reaction to delays in negotiations, as well as dovishness of some MPC members "increase downside risks to our call".

"We still think signing a new agreement is the most likely outcome, given very high external financing needs, high leverage of the economy, and low policy credibility". But delays in preliminary negotiations and potentially difficult talks with the IMF still ahead mean that the earliest possible date for signing an agreement is now around mid-Q3, very close to the largest spikes in external debt repayments in Q3 and Q4, analysts at Goldman Sachs said.

Morgan Stanley's London-based economists said that "given the current impasse" in the negotiations with the IMF and the EU, "a solid majority" of the MPC is likely to "choose to wait and see".

Until a safety net materializes in the form of a Stand-By Arrangement, "we do not see a case for rate cuts".

Conversely, "we think that the bar for rate increases is also quite high": probably €/HUF would have to retest its recent highs and Hungarian risk would have to decouple from CEE risk to trigger a rate increase.

"Our base case sees rates on hold for several months, and rate cuts (of) 50bp in the latter part of the year, on the assumption that an agreement is reached in late summer", Morgan Stanley's analysts said.

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