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City predicts steady rate for Hungarian currency

Analysis

Hungary's main policy rate is now set to stay on hold well into next year, London-based emerging markets analysts said, stressing that they do not anticipate a swift monetary easing either, due to a still pronounced build-up in cost pressures.

Christian Keller of Emerging Markets Strategy at Barclays Capital in London told Econews that the Hungarian Central Bank’s (MNB) base rate may have peaked at its current 8.50%, but “this is a peak where the far end is not a rapid decline.”

“We may have seen the peak in inflation (as well), with the base effects and food inflation helping a bit, and it will come down but it will not come down quickly,” he said.

Thus the central bank has to remain very vigilant and therefore its interest rate is not likely to come down anytime soon. “We may see an easing at end-Q1 2009, but nothing in the short term,” Keller added.

Dresdner Kleinwort said on Monday that it expects the 8.50% base rate to represent the peak of the current rate cycle.

However, the policy makers will likely maintain a cautious stance and “not rush into easing mode” as core inflation has remained elevated, and investor sentiment could yet suffer in case of fiscal deterioration “in the face of populist pressure on the government.”

Dresdner said the latest minutes of the policy-setting council’s (MPC) session also underscore its projection for a prolonged period of steady rates, until at least Q1-2009.

The notes from the June meeting showed that the MPC continues to see wage growth well above productivity gains and therefore a source of risk for medium-term inflation.

“Interestingly,” the board appeared split between those that see the latest oil spike as speculative, and therefore in favor of maintaining a wait-and-see stance, and those more concerned about the immediate spillover effects on inflation and expectations, Dresdner added. (MTI – Econews)

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