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Forint and CPI wobble will not stop MNB cut next week

Hungary's central bank MNB is set ease its policy rate further on Monday despite recent forint volatility and an pick-up in inflation, but the easing cycle is now nearing its end and is likely to slow down going forward, London-based emerging markets analysts said prior to this year's last monetary policy meeting, due on Monday.  

JP Morgan said it sees the decision “as a close call between a 25bp and 50bp cut ... our base case is for 50bp”. The MNB has been cutting steadily since July and has delivered a cumulative 300bp in easing. But the policy rate at 6.50% is still relatively high, considering that inflation is expected to sink to around 2% in the second half of next year, undershooting the central bank's medium term 3% target.

Data since the last MPC meeting “have been mixed”. November CPI inflation was a touch higher than expected but this follows four consecutive months of substantial downside surprises.

Softer-than-expected wages should also mitigate inflation risks over the medium term. On the real economy, while industrial production in October posted a strong month-on-month gain, Hungary's overall recovery continues to lag the rest of the region, JP Morgan said.

Inflation and activity figures justify another 50bp rate cut this month. However, some MPC members will likely argue for a smaller cut owing to a weaker currency, it added.

Goldman Sachs said its baseline scenario is for another 50bp cut, taking rates to 6%. While the pick-up in the November CPI print was above expectations, this “doesn't materially change” the outlook for inflation in the second half of 2010 when “both we and the MNB forecast CPI to drop below the 3% target%.

Given that Hungary is lagging the European recovery, there is still room to lower rates further. However, the recent financial market volatility has weighed on the forint and, as the easing cycle draws to a close, “we think the MNB will want to tone down market expectations of further cuts”.

Given that the previous meeting saw two members pushing for an aggressive 75bp move, “we think the MPC will still opt for a 50bp cut on December 21 ... but we expect the last 50bp of cuts to come in two 25bp clips”, Goldman Sachs said. (MTI – Econews)