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MNB likely to cut another 25bp Tuesday, may opt for 50bp on rapid disinflation, says City

Analysis

Hungary's central bank is set to forge ahead with its ongoing easing cycle with another 25bp rate cut at its meeting on Tuesday, but it may opt for a more aggressive 50bp cut as consumer inflation is now declining more rapidly than the policy rate, leaving real rates higher, London-based emerging markets analysts said to MTI prior to the monetary policy council's rate-setting meeting. Economists at Barclays said that against a cumulative 200bp rate cut during the past eight months to 5.0%, inflation has declined even more, down some 300bp since August 2012 to the latest year-on-year print of 2.2%. Thus, the real rate has widened to a relatively high 280bp. Against this background, accelerated monetary policy loosening appears justified, and "we think this supports a 50bp cut at the rate decision meeting" this week. "We think that the rate will be cut to 3.5% in this cycle". However, the recent announcement by MNB Governor György Matolcsy, suggesting "unorthodox methods to loosen monetary policy", could act as an alternative to increasing the pace of rate cuts, Barclays' analysts said. Emerging markets economists at Goldman Sachs in London said they the expect the MPC to cut rates this week by another 25bp, and looking ahead, they see one more 25bp cut in May, bringing the policy rate to 4.50%. And while "we still see the easing cycle stopping there, we also acknowledge that the risk of more cuts has increased recently". On the domestic side, the fast fall in headline inflation means that real rates are now higher, suggesting that the MNB can consider easing more without putting undue pressure on the external funding outlook. On the external side, the additional easing in Japan and heightened expectations of another ECB cut also point towards lower risk to bond demand even under lower MNB rates.

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