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City: MNB may tighten “beyond 9%”, Monday rate hike done deal

Analysis

Hungary’s central bank (MNB) is set to hike its policy rate by another 25bps at its next meeting on Monday and the persistently high wage figures may pressure it into tightening beyond the 9% the City sees as the peak of the current monetary cycle, London-based emerging markets analysts said.

Dresdner Kleinwort said on Thursday that gross earnings in the public sector, up 12.8% year-on-year in April, showed a double-digit growth for the third consecutive month. Furthermore, the government “is once again considering to increase VAT next year, in order to partially fund some tax cuts, probably to reduce labor costs”. Such a decision “will create new challenges” for the MPC by adding new upward pressures on inflation.

The latest developments “strongly argue in favor” of another 25bps hike already at the next MPC meeting and highlight the need for another one soon after that. Continuing elevated energy costs, political uncertainty and the potential for a VAT hike next year are all important risk factors that may force the MPC to eventually tighten “even beyond our current forecast of 9.00% as the peak for this cycle”, Dresdner said.

In a separate comment, Merrill Lynch said that given a shift towards more hawkish rhetoric by both the ECB and the Fed, it has revised up its interest rate forecasts for a number of EEMEA economies. In Hungary, it sees the base rate at 9.00% at end-2008, compared with the previous 8.50% forecast, with the next 25bps move likely at the Monday MPC meeting. Merryll Lynch is the latest City-based investment bank to raise its rates outlook for Hungary.

JP Morgan has said that with large increases in household energy prices in the pipeline for the next three months, inflation is likely to remain stuck around the current level until September. It said its year-end inflation forecast has moved up to 6% from around 5.6% previously, and after the worse than expected CPI figure for May it added another 25bp rate hike to its forecast and now sees policy rates peaking at 9% in the Q3, with the next hike likely to come as early as this month’s MPC meeting.

Goldman Sachs has also reiterated its expectation that the MNB will maintain tight monetary conditions, and that a rate hike is likely at the next MPC meeting. It said its baseline expectation is that the MNB will increase rates by an additional 50bp to 9% in the next three months. (MTI-Econews)

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