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ECB to cut shortly and deeply, Hungary to follow with a lag, City says

  The euro area’s central bank is set to embark on an aggressive easing cycle as early as late this year and Hungary is likely to follow suit, but with a lag, due to a declining global risk appetite, London-based emerging markets analysts said on Friday.

 

In its weekly New Markets Analyst report released in London, Goldman Sachs said it now forecasts a cumulative 75bp rate cut by the European Central Bank by mid-2009, to 3.5%, with the first 25bp move coming as early as this December. The factors pushing the ECB towards rate cuts - slower growth, lower commodity prices and thus less inflation pressure - are also evident in Central Europe. But the exact asset price implications of the coming ECB rate cuts for Central Europe will depend on changes to other variables.

Inflation in Central Europe is very much dependent on the exchange rate and, owing to the simultaneous decline in global risk appetite, it is not straightforward that ECB cuts would result in a significant strengthening of CE currencies, GS said. Hungary is still “one of the most susceptible countries in the region” to any waning of risk appetite, and in the current environment “the MNB (National Bank of Hungary) will want to be cautious”.

Goldman Sachs said it expects no change in MNB’s base rate until the end of this year, and then rate cuts in Q1/2009 when the first crucial 2009 wage data are available. “We leave our 3- and 6-month forecasts unchanged at 8.5% and 8.0%, respectively ... (but) we expect the lower interest rate environment ... to have a greater impact on a 1-year horizon, and we reduce our (12-month) rate forecast to 6.5% from 7.5%” for Hungary, GS added. (MTI-Econews)