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City sees further 50bps hike, more if coalition breaks up

Analysis

Hungary’s central bank is set to hike its policy rate by another 50bps, with a distinct chance of a much more aggressive monetary tightening should the ruling coalition break up, London-based emerging markets analysts said after the National Bank of Hungary (MNB) decided to raise its base rate by 50bps to 8pc on Monday.

Wike Groenenberg, director for emerging markets strategy at Citigroup in London told Econews the central bank had indicated by the rate hike that they are concerned about missing the inflation target again in 2009. The MNB will deliver more rate increases, either at the next meeting in April, “or soon thereafter” as the market is pricing in another 50bps over the next three months, and “they are correct to do so”, she added. Asked if she thought that the political dispute within the coalition was a factor in Monday’s rate hike decision, Groenenberg said “it might have had a small impact ... (but) the market and ourselves were already looking for a 25bps to 50bps rate increase even before the political news broke” as the arguments for a rate hike from an economic perspective “were strong”.

Michal Dybula, Central European economist at BNP Paribas, said, however, that the political developments had been the key driver for the MNB to opt for a 50bps hike on Monday. These problems which “have again sparked havoc on the bond market” and sent the forint above the 260 mark versus the euro “were quite instrumental in getting the 50bps that we have got today”, he said yesterday. If there is a coalition break-up, and “people will feel, that the fiscal outlook becomes messy and probably much looser ... then they will certainly demand a much higher risk premium for holding or buying Hungarian assets”. This sentiment can easily drive the forint well above the 270 level, and the central bank will have no other way out than to continue the tightening process, and “we can easily get even 200bps in rate hikes”, Dybula said. (MTI-Econews)

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