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MNB rate rise campaign over for a spell, say City analysts

Analysis

Emerging market analysts polled by MTI's London correspondent on Monday, after the National Bank of Hungary (MNB) decided to keep rates on hold, said the bank's campaign of rate rises was over "for the time being", mainly because of the strengthening of the forint.

Adam Slater of Intrinseca Research said Monday's decision does not mean an end to the MNB's cycle of monetary tightening as inflationary pressure remains strong. He said the main reason behind Monday's decision was the sharp strengthening of the forint in the past weeks, but noted that it would probably not strengthen much further calling a rate of 255 to the euro "very strong indeed".

Slater also attributed the reason for the decision to the positive mood on global markets. This, however, "will obviously not last forever," and a downgrade by Moody's also still remains a possibility. Moody's recently said it would audit Hungary for a possible downgrade, which sends a stronger message than simply downgrading the outlook for the country. Slater projected two further rate rises, of 25 basis points apiece, bringing the base rate to 8.5%.

These will occur only in the first half of 2007, he added. Credit Suisse's Olivier Desbarres said "the doves have the advantage" following Monday's rate decision. If there is no dramatic change in core inflation or the forint's exchange rate, the base rate could remain unchanged for the time being, he said. The fact that the bank forecasts inflation well over its target for 2008 means it is leaving room for rate rises in the future, but "not in the near future".

Desbarres noted that central bank governor Zsigmond Járai's mandate would expire in March and his replacement was likely to be a dove. This could mean the bank could hold off on further rate rises until the second quarter of 2007. Raffaella Tenconi of Dresdner Kleinwort said the bank would raise rates in the coming quarters because its inflation targets clearly are not in line with its mid-term inflation target.

She added that the forint's strengthening had allowed the bank to pause with its campaign of rate rises until it is able to better analyse the effect of previous rate rises on the economy. Tenconi projected the bank would raise rates 25 basis points - 50 basis points in the first half of 2007. She added that investor confidence, the size of wage rises and the government's budget policy all still posed uncertainty.

More than half of the emerging market analysts polled by MTI's London correspondent before the rate decision said they expected the bank to keep rates on hold based on comments by Járai in the previous week. He said, "A rate rise is not the only possibility." (Mti-Eco)

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