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Analysts expect central bank to sustain current loosening cycle

Analysts polled by MTI on Monday said that they expect the National Bank of Hungary (MNB) to continue its monetary loosening policy, forecasting a further decline in the MNB’s key-rate to around 7% by the end of 2009 under a best-case scenario.

The MNB cut its key-interest rate by 50 basis points to 10.00%, as expected, on Monday afternoon. The cut was the third 50bp reduction since an extraordinary 300bp rise carried out to defend the forint against a speculative attack on October 22.

ING Bank analyst Dávid Németh said that the MNB’s post-decision statement suggests that the bank has continued to monitor the interest premium expected by investors, and is thus unlikely to make any “ill-considered” rate cuts in the future. Németh said that the MNB’s 50-basis-point cut did not surprise the market, noting that the forint weakened briefly to 267 in trade against the euro following the central bank’s announcement of the rate reduction before quickly firming back to 266 against the single European currency. Németh predicted that key-interest would fall to 7.5% by the end of next year under a best-case scenario.

MKB analyst Zsolt Kondrat commented that the NBH’s key-interest rate could be reduced even more if global economic circumstances improve. The rate could fall to as low as 6-7% as a result of a greater-than-expected decline in inflation. Kondrat cautioned, however, that the external environment contains significant risks. The MKB analyst said that consumer price inflation could fall to the targeted 12-month rate of 3% already this month and to below 2% next year. Kondrat remarked that although current macroeconomic data provides the National Bank of Hungary with more room to reduce rates, the MNB will have to reconsider further cuts if the situation deteriorates to an unexpected degree or another wave of risk-aversion washes over Hungary, thus causing the forint to weaken.

The MKB analyst added that in the event of such a situation, the central bank will have to choose between the alternatives of raising rates or simply suspending rate cuts. Kondrat said that the MNB’s post-decision statement does not reveal whether the bank is prepared to make extraordinary rate-decisions next year as well, or intends to adhere to the originally announced agenda. The MKB analyst added that neither does the statement indicate if the MNB has targeted a certain interest rate that it would like to achieve. (MTI-Eco)