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City upholds 2008 base rate cut forecast

  The window of opportunity for a year-end rate cut remains open, but the global financial turmoil and the related risk appetite volatility may delay the start of the easing cycle into early 2009, London-based emerging markets analysts said after the MPC decided to keep its 8.50% base rate on hold at its Monday meeting.


Christian Keller, Central European economist at Barclays Capital told Econews that were it not for the financial market turmoil, he would have said the first cut would take place in the last quarter of this year. This still could happen before the end of the year, but “it’s very difficult to predict”.

On a more bullish note, Ralph Sueppel, Global Emerging Markets Chief Economist at BlueCrest Capital Management told Econews that he expects the first rate cut this year. Asked about the possible extent of the easing he anticipates for the next 12 months, he said “it’s going to be a lot ... we’re talking about something like 200-300bps”.

The predominant factor shaping Hungary’s monetary policy going forward is the downturn in the European business cycle and the increasing financial sector pressures, he said. Hungary is a small, open economy highly dependent on the European business cycle and is not in a position to offset cyclical drag from Western Europe, so the euro area performance “is not just the factor, it’s the predominant factor for the monetary policy”, Sueppel stressed.

Dresdner Kleinwort, however, said in a research note released in London that other important factors “are likely to stand in the way of interest rate cuts in the immediate term”. On the external front, the global financial market turmoil continues to wreak havoc with risk appetite and poses a threat to the forint, which has already lost around 5.5% in value against the euro in the last three months.

Equally importantly, the ongoing political deadlock at home, and the associated uncertainty about the 2009 Budget and tax reform plans, are also set “to keep the MPC members on their toes”. Against this background, policymakers will likely leave interest rates on hold at 8.50% in the short term, with the first cut likely to be postponed until Q1/2009, Dresdner said. (MTI-Econews)