Soft economic outlook and easing inflationary pressures may prompt Hungary’s central bank to cut its policy rate as early as this year, London-based emerging markets economists predict in their latest forecasts.
Analysts at RBC Capital Markets said in a research note on Hungary released to investors in London that with the foreclosure restrictions included in the plan designed to help distressed FX-indebted households, banks will be slow to clean up their balance sheets and, as a result, their willingness to lend will be hampered. “Building a recovery in the domestic economy will therefore be difficult, leaving Hungary once again highly vulnerable to external (predominantly German) demand”.
Recent fiscal tightening, “while long overdue and commendable”, will further squeeze domestic activity.
In the meantime, inflation has dropped back within the MNB’s 2-4% target range, “opening up prospects that policy rates could start to come down”.
“We predict that the MNB will cut the repo rate by 25bp to 5.75% in Q4 (most likely at their November policy meeting), with the possibility of a follow up move coming in the early part of next year”, RBC said.
In a separate report on the inflation outlook of the CEE region, Capital Economics said that with Hungarian businesses and households still in the process of repairing their balance sheets following the financial crisis and the government’s fiscal squeeze, domestic demand is set to remain “anemic”.
In particular, households’ disposable income will be constrained by the need to service “increasingly expensive” FX-denominated loans, with around two-thirds of mortgages denominated in Swiss francs and the forint having lost some 18% of its value against the franc since early April.
Given the weakness of the domestic economy, “we believe that the MNB will seek to lower interest rates in 2012, although due consideration of the impact on the exchange rate may limit any easing to 50bps or so”, Capital Economics said.
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