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Goldman Sachs: MNB could test <3% base rate

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Hungary’s central bank (MNB) may test the sub-3% policy rate territory if external conditions remain benign but monetary tightening may become necessary later as utility price cuts fade from CPI numbers and growth picks up, London-based emerging market economists said yesterday.

In the latest report of its CEEMEA Economics Analyst series released to clients in London, Goldman Sachs maintains its view that the Monetary Policy Council will continue to ease and will cut the base rate to 3.0% by another 60bp.

“But we also see downside risk to our forecast and think the Monetary Policy Council could cut more if the external risk environment, the forint and external funding conditions allow ... In particular, a stronger, better anchored forint, less responsive to changes in US rate expectations, could lead to more cuts.”

That said, “Hungary is where we have the least conviction on the direction of monetary policy in 2014 ... Here, much will depend on global risk sentiment, the demand for EM assets, and the Monetary Policy Council’s communication.”

In general, “we think Hungary can accommodate a gradual forint depreciation [and] the MNB should be able to maintain lower rates and start hiking them only in the fourth quarter of 2014 or the first quarter of 2015, when the recovery is more established, the effects of various utility price cuts fall out of inflation and inflation expectations pick up.”

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