Are you sure?

City sees chance for rate cuts early '09 despite volatile forint

Weak growth and the improving inflation outlook keep chances for a policy rate cut early next year alive, but recent bouts of forint volatility and increasing risk premia all but rule out any easing for the rest of this year, London-based emerging markets analysts said.

Reviewing its forecast after a much softer-than-expected 5.7% CPI reading for September, JP Morgan said that despite the depreciation of the forint in October, it now sees a good chance that year-on-year inflation will drop to below 5% by year-end and the central bank's 3% target also looks to be within reach by the end of 2009.

Risks to the forint from a slowdown in FX borrowing are likely to keep the Central Bank (MNB) cautious for now, but given rising risks of a recession and the increasingly benign inflation outlook, a rate cut is likely to be on the cards early next year, it said.

“We have moved forward the timing of the first cut in our forecast to Q1 ... from Q1 (of 2009)” it added.

On a more bearish note, Barclays Capital said that the environment is conducive for further disinflation in Hungary, and this would point to rate cuts beginning as early as next month, but the recent currency weakness and rising risk premia for Hungarian assets make such an early easing scenario “very unlikely.”

A sustained appreciation of the forint back to its summer levels is also unlikely in the new global environment. This means that the currency works against the favorable inflationary effects from slower growth and softer commodity prices, Barclays Capital said.

This would still not outweigh the effect from oil which, at current prices, is only about 40% of what the MNB assumes for 2009. However, Barclays Capital sees oil prices gradually rising again during 2009, averaging at around $114, which makes the effect from energy prices “less clear.”

It said it leaves its end-year CPI forecast at 5.0% “for now,” although the downside risk to that forecast has increased. Similarly, “the chances are now higher for an earlier rate cut than in our baseline scenario (which calls for) starting in April 2009, ending the year at 7.0%.”

“We continue to expect the MNB to act cautiously, monitoring not only the government's announcements ... but also the potentially adverse developments on the FX credit front (such as) a recent announcement by a foreign-owned bank to halt its FX lending activity in Hungary,” Barclays Capital said. (MTI – Econews)