Eyes fixed on MNB’s council meeting Tuesday

MNB

Tomorrow’s meeting of the Monetary Council of the National Bank of Hungary (MNB) is expected to be characterized by further easing along new vectors, while forward guidance on BUBOR and the duration of EUR/HUF swaps will be watched especially closely, according to London-based analysts of Japanʼs Nomura.

“We think it would be a mistake to interpret the MNB’s rhetoric since the last meeting, that they are broadly happy with BUBOR around current levels, as a sign of the end of easing,” says a Nomura flash comment sent to the Budapest Business Journal on Friday. Nomura notes that the 3M BUBOR is a key component in the monetary stance and is expected to come into focus tomorrow, as part of a much wider rates complex.

“It is possible to ease without further reductions in BUBOR (though that can happen as a second-order effect too). In the same way, the policy rate has been unchanged since May last year, yet monetary conditions have been markedly eased since that time,” Nomura adds.

Given that “weak 2016 growth data point to a weak 2017, and with uncertainty over the scale of effect the structural funds and external reflation narrative can have on Hungary,” Nomura believes the MNB will look to further ease conditions tomorrow.

“Equally, they may look for more pressure for a weaker HUF in both nominal and (given the current account surplus, more importantly) real terms. In our opinion, the MNB wants a high-inflation, weak currency path to competitiveness and higher potential growth. That said, we think further easing will be presented as necessary to ensure inflation is anchored at target in the medium run,” Nomura says.

According to Nomura, the Monetary Council will focus on adopting measures that will convince the market that BUBOR fixings will be unchanged for longer, as opposed to lowering the fixings themselves; it is expected, therefore, that the MNB will be looking to flatten the curve as the next key method of monetary easing.

“Overall we think the market may start to realize after this meeting that even with inflation momentum and risk as it is, the MNB is firm on further easing. This will be tested through Q2 as we move towards a target breach in Q3, but we still believe the MNB framework of unorthodox postmodern monetary policy has internal consistency and no-trilemma problem (when you actually want outflows, and higher inflation). As such, we still believe BUBOR will be roughly unchanged through year-end,” the Nomura forecast concludes.

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