A 50bps interest rate hike is the most likely outcome at the rate-setting meeting of Hungary’s Monetary Council on Tuesday, with a smaller chance of a "more decisive" step of a 200bps hike also on the cards, London-based emerging markets economists said on Monday.
Analysts at Goldman Sachs said that after Hungary’s downgrade by Moody’s late last week, and with the pressure on funding costs intensifying, "we now think that the Monetary Council will try to defend the currency and attempt to stem capital flight by hiking policy rates, starting from this week’s meeting".
The exact pattern of the hikes is less easy to forecast and the expectations on the precise magnitude of this week’s hike "are much divided".
Given that the views of the Monetary Council members have also been "much divided", the Monetary Council is more likely to hike in several steps, monitoring the market reaction in between.
Hence "we expect a hike of 50bps to maximum 100bps in this week’s meeting, followed by 25-50bps hikes in the coming meetings to result in a cumulative tightening of 200bps to 8% by the end the first quarter of 2012".
A less likely decision, at the moment, is that the Monetary Council agrees to step in more decisively, and hikes policy rates in one, maximum two steps by some 200bps, signaling more clearly that it considers this situation an emergency, analysts at Goldman Sachs said on Monday.
Following such hikes, "we would expect the Monetary Council to remain on hold in Q2, and then start to gradually reverse the hikes, and bring the policy rate back to 6% in around 12 months’ time, depending on the timing of any IMF program and the ability to stabilize the exchange rate".
However, there is a risk that the Monetary Council may disagree over an even small hike on Tuesday, and may in the end conclude that if there is not enough support for a very decisive step and a large hike, it would be better to stay put, instead of proceeding with cautious smaller hikes which may turn out ineffective and would hit the Monetary Council’s credibility. Pressure on the forint and local yields would then mean the M% may decide to step in in December, or when it concludes that there has not been enough progress over the IMF deal to avert another crisis, London-based economists at GS said.
JP Morgan’s emerging markets analysts said they expect the MNB to raise rates by 50bps at this week’s Monetary Council meeting and signal that it is ready to tighten further if needed on the backk of the escalating financial market stress in Europe, coupled with the Moody’s downgrade. Forint weakness is now leading to deterioration in the inflation outlook and is putting pressure on balance sheets.
JP Morgan’s analysts also noted, however, that there is a risk that the "four external Monetary Council members block a hike or that we get a compromise move of 25bps" which could necessitate a larger hike next month.