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City remains split over rate hike outlook

Hungary’s central bank (MNB) is seen hiking its policy rate on Monday by the majority of London-based emerging markets economists, who, however, remain split over the extent of the anticipated tightening, and there is still a significant minority who say that the MNB should hold its fire for now and start easing later.

One of the most aggressive rate hike forecasters polled by Econews in London, Goldman Sachs said the chances of a 25bp and 50bp hike “are almost the same”, but unfavorable wages data for February “should push the Monetary Council to the hawkish side”. January private-sector wage data were already “an unpleasant surprise” for the National Bank of Hungary (MNB), and played a role in its decision to hike rates in March. The MNB was hoping for a slowdown after the January spike, but so far has seen an acceleration in private-sector wage growth, both gross and ex-bonus payments, GS said.

A strengthening forint is pushing in the opposite direction, but “we think the Monetary Council is looking at longer-term developments here, and is also aware that the risk of a forint weakening remains (as) most of the recovery is based on better global risk appetite”. Goldman Sachs said it expects rates to increase to 9% in the next three months, from the current 8%, a level that is higher than what the market is pricing as the peak rate implied by the FRA contracts is around 8.50%.

On the dovish end of the forecast range, Merrill Lynch said on Friday, that the MNB should leave rates unchanged at 8.00% this month, given a 50bps hike in March and following the “sharp downward move” in EUR/HUF, as well as the lower-than-expected March CPI inflation print. The major argument put forward by advocates of the rate hike was acceleration in wage growth in February. Given the volatility of wage series at the start of the year, however, “we tend to interpret these data with caution”. Merrill Lynch reiterated its view that Hungary “is flirting with stagflation”, economic growth slowed to sub-1%, a 11-year low, and while it is expected to rebound somewhat in 2008 the underperformance is likely to continue, with Merrill Lynch expecting 1.2% after 1.3% in 2007. Given the unprecedently high negative output gap at -3% of GDP and favorable base effects, “we expect the headline CPI inflation to collapse towards 4% by end-2008, and to 3% in 2009”.

Of the ten major City-based investment banks polled by Econews, seven expected rate hikes either on Monday or in the next MPC meeting in May, with Merrill Lynch, UBS and BNP Paribas standing out by saying they saw the MNB stay on hold for now, and potentially restart its easing cycle later this year or in 2009. (MTI-Econews)