The National Bank of Hungary's Monetary Council is likely to leave the key central bank base rate on hold at 5.25% on Monday, and no further rate cuts can be expected in the near term, according to analysts polled by business daily Napi Gazdaság.
Although money markets have been relatively calm since the last rate-setting meeting, this is not sufficient for a monetary easing, analyst Gergely Suppan of Takarékbank told Napi. The uncertainty following the suspension of the IMF talks in the middle of July has eased and the forint's exchange rate has stabilized, however, Hungary's risk assessment has not improved significantly.
Hungary's CDS premiums have varied between 330-340 in the past month compared to 200 last autumn and 180-190 at the time of the general elections in April, Dániel Bebesy of Budapest Fund Management added.
Emerging market government securities remain very popular, which supports demand in Hungarian government securities, thus, the uncertainty resulting from the suspension of the IMF talks can be offset by global market processes for the moment.
Domestic developments will come into focus after the municipal elections in October, Bebesy said.
If the government cannot then present some credible and sustainable budget plans, more serious movements could follow on the market of Hungarian government securities, moreover, the financing requirement will grow significantly in the following years.
Even a weakening could continue to be offset by global risk appetite, but if the positive sentiment ends on markets, the country's risk assessment will no longer be within our control, the analyst added.
In addition to risk assessment, inflationary risks could also be included in the central bank's arguments. Food price rises could push the inflationary curve higher, which could be a further argument against a rate cut. However, with low current and prospective core inflation, the Monetary Council is not in an easy position when assessing inflation.
This raises the old problem of the inflation targeting regime as only a forint strengthening could help lessen the price pressure coming from import goods, Bebesy said.
Looking ahead, a monetary easing from the central bank can only be expected if the government can come up with a budget proposal containing a deficit of less than 3% for 2011, Suppan said. In that case, the country's risk assessment could improve and the forint could strengthen, which could provide the MNB with greater room to maneuver. (MTI – Econews)