MNB’s Dovish Policy Stance may Hang Around, Analysts Say

Bank of America Merrill Lynch and Morgan Stanley have published their notes from their recent visits to Budapest and some other CEE capitals.  

“CEE trips reveal no major pressures on regional central banks to change their respective course of action. The Czech National Bank (CNB) keeps on hiking. The National Bank of Hungary (MNB) and the National Bank of Poland (NBP) stay dovish, delaying policy tightening as much as they can. The National Bank of Romania (NBR) has found reasonable justifications to pause,” BofA-ML summed up its findings on October 22.  

Analysts at BofA-ML believe that, as long as the EUR/HUF exchange rate is stable, the central bank will likely manage to stay in its current holding pattern until mid-2019. The MNB has expressed both readiness and reluctance to tighten policy at the same time, BofA-ML said.  

“We believe the MNB is sensitive to sharp HUF depreciation, so it will not delay changing its stance at all costs, but will need a significant trigger to move before Q2 2019,” the analysts wrote.

In their view, the rate setting Monetary Council will only take key decisions in the months it publishes its “Inflation Report”, so that it can incorporate all factors, including the HUF developments, to assess the inflation outlook.  

“It downplays the impact of various volatile components on the CPI in recent months, while the second round impact of FX depreciation and higher oil is to be seen. If EUR/HUF remains within a stable range, we think the MNB will not want to tighten policies until H2 2019, with announcement for changes in its liquidity management probably in March at the earliest,” the analysts emphasized.

Main Toolkit

The main toolkit for the first steps of monetary tightening will be a combination FX swaps and overnight deposit rates, the analysts believe.

Financial analysts at London-based Morgan Stanley, however, think that higher global crude oil prices could push the consumer price index above 4% year-on-year in Hungary in the first half of 2019, “potentially causing the MNB to start tightening liquidity in March or June, though still at a measured pace”, Hungary’s business portal portfolio.hu wrote.  

The comprehensive study on emerging markets, published recently, found that in the CEE region, oil prices filter through to inflation most in Hungary and Romania. This is partly because the weight of fuel in the CPI basket is higher in these two countries (7.7% and 5.9%, respectively) than in Poland (4.4%) and Czech Republic (3.5%).  

According to Morgan Stanley’s forecast model, every 10% increase in oil prices could add 80 basis points to the annual inflation rate in Hungary, considering both direct and indirect effects on prices. As a result, 12-month inflation will likely rise to more than 4% for a short time in 2019. Hungary’s Inflation hit 3.6%, a 5.5-year high, in August.  

Interestingly, the MNB actually projects lower inflation: the central bank expects CPI to rise no more than 4%, the top of its tolerance band, and to remain stable at 3% from the second half of 2018, in line with the long-term target.

Deficit Target Achievable Next Year

Hungary’s general government deficit could reach 2.2-2.3% of GDP this year, which is a bit under the 2.4% target in the Budget Act, the National Bank of Hungary (MNB) said in a freshly published biannual report. The central bank said in its Public Finance Report that its projection would depend on whether reserves in the Country Protection Fund are tapped.

Tax revenues are expected to exceed the target in the Budget Act by the equivalent of 0.6% of GDP, supported by revenue from corporate taxes, as well as taxes on consumption and on labor, the report reads

Pay rises pushed forward in the healthcare sector, vouchers awarded to pensioners, a subsidy for winter utilities bills and higher spending by budget-funded institutions could lift expenditures over targets, but these effects could be countered, in part, by lower than expected spending on fostered work programs and disability payments, the central bank added.

The MNB said the deficit target of 1.8% of GDP in the 2019 Budget Act is achievable, but projected that revenue would be under the target by the equivalent of 0.2% of GDP as wage growth slows, affecting payroll tax targets. This could be balanced by higher European Union transfers and lower co-financing costs for EU-funded projects, it added.

The central bank sees Hungary’s state debt as a ratio of GDP declining to 72.4% at the end of 2018, and approaching 70% at the end of 2019.

Numbers to Watch in the Coming Weeks

The Central Statistical Office (KSH) will publish Hungary’s retail trade data for September on November 7, followed by a first estimate of the economy’s industrial production for the same month. Also on November 8, KSH will release its first estimates on Hungary’s consumer price index in October.