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MNB rates surprise just a pause - City says

Analysis

Hungary’s central bank (MNB) is just pausing in its tightening cycle by having left its policy rate unchanged in a move mainly driven by a strong forint, London-based emerging markets analysts said on Monday.

Defying a City consensus that had called for a 25bps hike on Monday as part of a cumulative 50bps tightening the markets have been generally pricing for this year, the MNB left its base rate on 8.50% in what analysts said was a surprise move after the MPC’s hawkish rhetoric over the past weeks. Juliet Sampson, Central European economist at HSBC told Econews that the forint’s strength, on Friday in particular, was very likely to have been a major contributing factor to “this pause” in the tightening cycle.

Given the strength of the recent inflation figures and wage data, it is unlikely that “we would have seen this pause had the forint not been so strong”. It’s a reminder that the forint remains an important input into the policy mix, and “I don’t think that the tightening cycle has ceased ... but it is likely to depend largely on moves of the forint”, she said.

Asked whether the absence of the expected rate hike this month raises the possibility of a more aggressive, 50bps hike next month, Sampson said that “not necessarily”. There is plenty of justification on the real data front for further tightening, but the real determining factor is going to be the forint. And if the forint is markedly weaker in the next month, it’s possible that there could be a 50bps hike, but the “base case has to be that they move gradually in the absence of (such a) forint movement”, she said.

The other factor that makes a 50bps move unlikely next month is that the MNB wouldn’t want to further encourage forint strength, she added. Michal Dybula, Central European economist at BNP Paribas also told Econews, that it was the forint strength that might have tipped the balance towards keeping rates unchanged. Whether it is a pause or the end of the cycle is a question for financial investors because the recent rally in the forint has been motivated by the fact that the market has been expecting further policy tightenings, one on Monday and “at least” one more, he said.

It is likely to be challenged now, so in that respect “I would be expecting the forint to be losing its appeal and eventually breaking above the 240 level quite soon”. If that’s the case, and “in between we don’t get any reassuring news on the inflation outlook”, then the MNB will have to carry on hiking rates, Dybula said. (MTI-Econews)

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