City analysts predict MNB rate cut in spring 2012


Hungary's central bank could cut the base rate early 2012 in response to the deteriorating growth outlook, London emerging market analysts said on Monday.

The latest forecast of the JP Morgan bank group's London-based emerging market analysts is that Hungary's economic growth will be 1.5% this year and 1.3% in 2012 in real terms. JP Morgan analysts have accordingly modified their forecast regarding Hungary's base rate and now predict an interest rate cut for Q1 2012.

JP Morgan's analysts now forecast that the central bank base rate will be cut from the current 6.00% to 5.50% in March 2012.

This is a major change from a few weeks ago, when JP Morgan still forecast that the next rate move of the NBH would be an interest rate hike, citing financing and forint exchange rate risks as reasons.

Other major London financial investment and consulting groups do not now rule out a monetary relaxation in Hungary.

The emerging market analysts of Capital Economics predicted, in their forecast given before Tuesday's rate-setting meeting of the Hungarian central bank's Monetary Council, that, in the weak growth and demand climate, annual average inflation will be 2.5% in 2012 after the 4% projected by the company for 2011.

Capital Economics analysts, however, said the NBH still has a limited room to maneuver to cut the interest rate as the decision makers must keep at least one eye on the forint because of the substantial stock of foreign-currency-denominated debt. The analysts note that the forint has weakened 35% to the Swiss franc since July 2008.

The central bank could even be forced to raise the rate as a defensive step if the propensity to take risk deteriorates dramatically, they said. In the absence of a serious deterioration, Capital Economics analysts see room for a monetary easing in 2012, and also predict a 50bp cut in the first quarter of next year.

 Some London analysts, however, believe that the NBH will not cut interest rates before the end of next year in spite of the weakening growth outlook.

The Morgan Stanley bank group's London emerging-market analysts, after considerably downgrading their growth forecast for the global economy, have substantially downgraded their forecast for the Hungarian economy, predicting 1.6% economic growth for this year and 1.4% for 2012 - compared to their earlier predictions of 2.6% and 2.0%, respectively.

The NBH would not be able to cut the base rate in spite of the slower growth and the positive inflationary outlook since the risk environment is now the "key factor" for Hungary's central bank, Morgan Stanley said.

Morgan Stanley analysts therefore expect to see a base rate of 6.00 in 2012, unchanged from the current level. Morgan Stanley earlier predicted a 0.5-percentage-point rate hike for next year.

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