MNB rate hike certain, uncertain by how much, says City


London-based emerging markets economists unanimously see Hungary’s central bank announcing another rate hike at its monetary policy meeting on Tuesday, but views are conflicting over the extent of the tightening, with some analysts anticipating a potential slowdown from the previous two 50bps hikes, an Econews survey conducted prior to Tuesday’s rate announcement reveals.

Analysts at JP Morgan said they expect the MNB to tighten monetary policy further until the forint settles at stronger levels, with EUR/HUF below 300 on a sustained basis, and upside inflation risks have diminished.

"Our base case is for another 50bps hike on Tuesday, in line with consensus; although risks are skewed towards a smaller move".

Progress with IMF/EU talks will be key to the timing and pace of further hikes. "Our base case is for the policy rate to peak at 8% in March 2012 and to fall to 6% by end-2012 assuming Hungary concludes an SBA (Stand-by Arrangement) in the second quarter of 2012", JP Morgan’s London-based economists said.

Analysts at Barclays Capital, a major investment banking group, said they expect the MNB to continue raising its policy rate, but only by 25bps to 7.25%, following 50bps increases in each of the past two meetings. "We think a more moderate rate increase is likely .... In December, inflation eased to 4.1% from 4.3%, but it is likely to rise in Q1 due to increases in VAT and excise rates".

Analysts at Goldman Sachs said, however, that even a 50bps rate hike would be a "compromise" as it is "somewhat less than priced in by forwards which indicate expectations of a hike of about 75bps".

Therefore, "we think that the M% will reach a compromise and opt for another 50bps hike to reduce the risk of capital flight and to support the currency". However, "risks to (this) call are high - we see the risk of the M% opting for a smaller hike if the more optimistic view over the EU/IMF negotiations prevails, (something that) was already visible last month".

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