In its weekly emerging markets macro report, Merrill Lynch said that monetary tightening in Hungary “doesn’t make any sense from a fundamental perspective”, and the 50 basis points hike announced last Monday will make the bank’s policymaking even more difficult going forward. Expectations that the MNB will deliver what the market is pricing have now strengthened considerably. And, distorted by the global liquidity crisis, fixed income market pricing is “an economic nonsense”. This may be a potential trap for the MNB, as it significantly increases the risk of either a policy “vicious circle” whereby the MNB is forced by the dislocated markets to go in the direction that “makes no sense economically”, or that of “a market-perceived policy mistake”, a situation whereby the MNB goes back and does not deliver what the market is pricing, increasing, in turn, the risk of speculative pressure, Merrill Lynch said. In this environment, despite “our fundamental-based belief that the MNB should not hike rates further … we now expect the MNB to hike rates by 50 basis points over the next three months, roughly consistent with market pricing”. Further out, “we stick to the view that the MNB should resume the easing cycle once markets stabilize in Q4 2008”. Thus, Merrill Lynch forecasts an end-2008 rate of 8.00%, a flat rate “that is a net effect of the likely hike(s) in Q2 and cut(s) in Q4”. Ahead, given the real economy gloom, “we have revised our 2008 GDP growth forecast down to 1.2% from 1.8%, (and) we see rate cuts of 150bp to 6.50% in 2009”, Merrill Lynch said. Policy-wise, the impact of the political tensions should not be significant given that “there are no major reforms in the pipeline following the completion of the 2006-07 fiscal package”, it added. In a separate weekly emerging markets report released in London, Goldman Sachs said of the political developments that the worst combination would be a hostile global environment, coupled with an attempt by a new Prime Minister (or the current one) to boost the popularity of the ruling parties by introducing spending policies. This would result in a sharp increase of the risk premium. The subsequent economic crisis would reduce the popularity of the governing parties further, and “precisely because of this predictable outcome, it is unlikely they would embark on these policies”. However, “our main scenario – muddling through for the next two years with not exactly low budget deficits and sluggish growth – could still be risky in an unfriendly global environment”, Goldman Sachs said. There is little room for maneuver, whoever holds the Prime Minister’s post as the market would severely punish any attempt to embark on populist spending policies, GS added. (Mti-Eco)
