The National Bank of Hungary (MNB) is likely to continue to bring rates down to the level before an extraordinary 300bp rate rise in October, but City analysts say the easing campaign could stop there because of the recent weakening of the forint.
The MNB raised rates 300bp to 11.50% before a national holiday at the end of October to make an attack on the forint more costly for speculative investors. Since the forint’s recovery, the rate has been cut a combined 200bp to 9.50%.
The forint has weakened over several days and slipped past 288 to the euro on Tuesday to reach a historical low.
Emerging market analysts at Dresdner Kleinwort said in a note that the MNB would probably bring rates to 8.50% by the end of the first quarter, but the campaign could stop there because of the weaker forint. “We maintain our view that Hungary’s relatively high FX-to-inflation passthrough, which we estimate at around 5% for HUF/USD and 7% for HUF/EUR, could eventually render the risks from further forint weakness sufficiently high for the MPC to reconsider its easing bias,” Dresdner Kleinwort said.
UBS analysts in London recently said the base rate would fall to 8.50% by mid-year, but the campaign of rate cuts could stop there if investors become more averse to risks.
Ralph Sueppel of BlueCrest Capital Management said on Monday, however, that holding off on continued rate cuts would present a bigger risk of forint exchange rate volatility in the current recession environment than a tightening of monetary policy. (MTI-Econews)