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Bank looks “more reactive” to market changes than assumed

The sharp rate cut may suggest that Hungary's central bank is ready to respond more swiftly to market changes than previously assumed, but future rate cuts are likely to be more gradual, London-based emerging markets analysts said.

The National Bank of Hungary (MNB) announced a 100 bps cut in its policy rate on Monday, surprising market participants and analysts who had broadly expected a 50 bps cut.

In its daily emerging markets update released Tuesday in London, JP Morgan said while there was “nothing surprising” in the comments from the press conference or the tone of the MNB statement, the magnitude of the rate cut suggests that the bank may be more reactive to changes in the market environment “than we had expected.”

JP Morgan said it thinks the cut also sends an “implicit message” that the MNB does not want to see HUF/EUR falling much lower for fear of jeopardizing an export-driven economic recovery.

Based on the outlook for inflation and the real economy, there is plenty more room for rate cuts, but the pace and timing will remain strongly dependent on global risk appetite. Assuming that current conditions hold, the MNB is likely to proceed relatively quickly with its easing cycle to avoid a prolonged desynchronization with regional and developed market central banks, it added.

“We now expect a more front-loaded easing cycle from the MNB: with rates falling to 7.00% by year-end (previously 8.00%), and 6.50% by mid-2010 (previously 7.00%) ... this forecast assumes EUR/HUF around 265,” JP Morgan said.

In a separate comment, Wood & Co., an investment company focusing on Central and Eastern Europe, said that the fundamental improvements and strengthening investor sentiment towards Hungarian assets created a window of opportunity for “a one-off” sharp rate reduction.

“We expect the Board to continue to reduce the base rate in coming quarters, but at a more gradual pace ... we now expect a further 50bps rate reduction in coming months, probably in September-October, and a potential further 50bps at year-end should the political backdrop remain favorable,” it added. (MTI – Econews)