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MNB to go ahead with gradual rate cuts amid ongoing recession and falling CPI, says City

Analysis

Hungary's central bank is set to go ahead with its easing cycle in further gradual rate cuts as inflation is falling and the economy is "struggling to escape from recession", but a marked deterioration in market sentiment may still force the Monetary Policy Council to pause, or even make a U-turn, London-based emerging markets analysts said after the MPC cut its base rate by a widely expected 25bp easing to 4.75% on Tuesday. William Jackson, a senior emerging markets economist at Capital EConomics said after the rate decision that Hungary's heavy foreign currency debt burden means it remains one of the most exposed economies in emerging Europe to a deterioration in global risk appetite. For now, "there appears to be little in the way of the MPC's pursuit of lower interest rates ... However, we remain concerned about the sustainability of the recent loosening of policy". Ultimately, "we think a souring in investor sentiment could force the MPC to halt – and even reverse – its easing cycle in order to shore up the forint", Jackson said. Analysts at 4cast, another major London-based financial consultancy, said, however, that they see the MPC switching back the "unexpectedly cautious" bias published last month to a previous, less cautious version. The statement released after the March MPC meeting called for an improvement in financial market sentiments as a prerequisite for further rate cuts, whereas Tuesday's statement calls for no further improvement in market sentiment for more cuts, just the prolongation of the status quo. Overall, this change in bias confirms that further cuts remain on the cards. "We still see the base rate bottoming out at 4.00%", 4cast's analysts said. Economists at JP Morgan in London also said that their base case is for the policy rate to reach 4.00% by end-July, with risks tilted towards more cuts thereafter provided the forint does not weaken excessively. "We expect April inflation to drop to around 1.8% (year-on-year) and see inflation remaining below the MNB's 3% target through 2013-14 ... (our) 2013 GDP forecast is -0.7% compared to the government's revised target of +0.7%", JP Morgan's analysts added.

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