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Barclays: Weak forint will halt MNB easing cycle

Analysis

The weak forint is likely to lead the National Bank of Hungary (MNB) to suspend its easing cycle after a small final interest rate cut this month, according to a Barclays report highlighting key findings of a recent trip to Budapest released to investors in London.

Barclays Bank’s emerging markets economists said officials in private and public sector meetings in Hungary “seemed very concerned about the weakness of the forint.”

Forint depreciation “seems to be viewed as undesirable” by the policymakers for several reasons, including household and business balance sheets still burdened with forex-based loan liabilities.

“Even though the FX vulnerability has diminished in the case of household, most of the counterparties in our meetings, private and public sector officials [alike], seem to think that forint depreciation from these levels is counterproductive or indeed negative for growth.” Some forint depreciation is acceptable for the central bank but trend depreciation – particularly at the recent pace – is not, the report reads in part. And with parliamentary elections coming up the first week in April, currency weakness is noted as “undesirable from a political standpoint.”

“We think the forint weakness is pushing the MNB Monetary Policy Council closer to pausing on rate [cuts. …] The MNB has loosened monetary conditions considerably without offering guidance as to when or why the loosening might stop,” according to the Barclays report. “It appears that the MPC has been looking for a sign from the market of when to stop. The HUF weakness and relative vulnerability to global market sentiment could be taken as that sign. We think the MNB will still cut next week, but at a reduced rate of just 5 bp and at the same time signal a pause to assess developments.”

At the same time, “we do not see the MPC moving towards hiking rates in the near future[. …] While officials are still satisfied with Hungary’s recovery from the 2012 recession, there are many reasons to be concerned that growth may prove fragile.”

– material from national news service MTI was used in this article

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