Commerzbank: MNB could cut base rate further by end-2017


Although the National Bank of Hungary (MNB) might not cut its base rate this year, the central bank could continue its easing cycle by the end of 2017, Tatha Ghose (pictured), Commerzbank director and senior EMEA economist, said today during a press briefing.

Commerzbank expects inflation to revise downwards after a brief acceleration, which might cause the Monetary Policy Council (MPC) to further lower the central bank’s base rate by the end of next year, Ghose said. The central bank held the rate yesterday during a rate-setting meeting, which did not surprise analysts, as the MNB announced it had finished its easing cycle in May. 

Due to the base effect from utility cuts, Commerzbank expects Hungarian headline inflation to accelerate from its current near-zero to higher than 1% by the end of the year. Commerzbank noted that the central bank lowered its headline inflation forecast from 1.7% to 0.3% this year, and core inflation from 2.4% to 1.7%. The MNB expects the core inflation to accelerate to 2.4% by the end of next year, which Commerzbank doubts. “We are skeptical that inflation will accelerate this much,” the bank said in its strategic currency briefing. 

GDP foreseen to slow to 2.2% 

Although Hungarian GDP grew by a solid 3% in 2015, the momentum is foreseen to decelerate this year, Commerzbank said. Commerzbank expects GDP growth in Hungary to slow to 2.2% this year.

Chief factors to slow the figure include risk to the German economy from developments in China, a slowing of EU funds this year before picking up next year and the fading of the automotive industry’s boom. “The PMI has already pulled back sharply towards 50 over the past quarter, and recent manufacturing data also confirm a loss of momentum,” Commerzbank added. 

Forint stable for now 

Due to the end of the base rate cuts, the forint could be more stable in the upcoming quarters, according to Commerzbank.

However, on the predicted continuing low inflation rate, which is foreseen to renew base cut expectations, combined with anticipated slow GDP growth this year, the EUR-HUF exchange rate could come under pressure, Commerzbank said. 

Furthermore, if the U.S.-based Federal Reserve raises rates in June-July and again in December, it could have an upward impact on the EUR-HUF rate. Commerzbank warns that “the forint may appear not to be exposed to the Fed, but … when the Fed increased rates in December 2015 and EM risk aversion shot up, EUR-HUF traded above 315.00, which shows that there would be significant risk in the event that the outlook for the Fed changed again in the opposite direction”. 

In the long run, Commerzbank does not expect the Hungarian forint to continuously depreciate, as Hungary runs a “significant current account surplus which has widened in recent years to 4%-5% of GDP”. Yet to consider Hungarian bonds investment grade, another credit rating agency needs to post an upgrade of the country, beyond Fitch’s recent announcement, Commerzbank says. 

Commenting on the forint’s depreciation in recent years, Commerzbank said the currency is still adjusting to a more “competitive” level after being artificially strong for years through high interest rates, a move which was pulled to prevent an external debt spiral during the crisis years in the eurozone. “Since then, risk has reduced around the eurozone, and Hungary’s own FX liabilities have sharply declined as a percentage of GDP,” according to Commerzbank. These positive developments, Commerzbank sees, made it possible for the MNB to lower rates sharply, to “levels which are consistent with the economy’s manufacturing sector competitiveness”.

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