Rate cut unlikely before FX repayment scheme ends, easing possible later, says City


Hungary's central bank is unlikely to ease its monetary policy before the FX repayment scheme ends but rate cuts may become possible in the longer run if the scheme results in less vulnerability to exchange rate swings, London-based emerging markets economists said after the Monetary Policy Council (MPC) meeting on Tuesday that had left the 6% policy rate unchanged in line with consensus.

Analysts at JP Morgan in London said that comments from the post-meeting press conference were "slightly more hawkish, in our view", highlighting upside risks to inflation if the forint were to stabilize at current, "relatively weak" levels.

"We remain comfortable with our call for no change in policy rates through the first half of 2012".

Near-term risks remain skewed towards a hike but only if the forint weakens sharply.

On the other hand, Hungary's vulnerability to FX swings could be materially reduced by mid-2012 if the government is successful in cutting the stock of FX loans, for example by allowing early repayment of those loans and switching them into HUF loans.

But until the FX loan scheme runs its course, increased local bank demand for FX will put pressure on FX reserves and/or the forint, making the MNB wary of implementing policies that could weaken the forint.

However, "our base case remains for 50bp in rate cuts in the second half of 2012", JP Morgan's London-based analysts said.

Economist at 4cast, a major economic and financial consultancy, said after the M% meeting that there have been no major changes to the stance of the MPC, but "all the small tweaks" point to higher inflation risks and hence the risks of a higher rate path.

Yet, at this juncture, heightened inflation risks "are only worth a change in tone from what was a rather dovish communiqué last month, now towards slightly hawkish". "We still see the MPC reluctant to hike rates but arguably rate hike risks remain – now marginally higher than a month ago", 4cast's analysts said.

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