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Further rates moves driven by IMF talks, says City

Further interest rate moves by Hungary’s central bank will predominantly be driven by how talks with the IMF and the EU over a potential credit line will progress, London-based emerging markets analysts said after the MNB announced a widely anticipated 50bps rate hike on Tuesday.

William Jackson, emerging markets economist at Capital Economics said the fact that Hungary is being forced into rate hikes at the same time as weaker demand from the eurozone is "pushing the economy into recession" reflects the predicament that policymakers are in.

A cumulative 100bps of rate hikes since November appear to have stabilised the markets. "But in truth, much now hinges on the progress of negotiations with the IMF ... Recent news that talks seem to have hit the buffers is unsurprising as ... there is a vast gulf between the terms on which the government would accept a deal and the terms on which the IMF would lend".

Nevertheless, "events may ultimately force the government’s hand". With banks already facing a funding squeeze, which is likely to intensify as the euro-crisis deepens, "a banking crisis cannot be ruled out". In this case, "all bets are off, Hungary would be left with no option but to return to the IMF", Mr Jackson said.

As things stand, "we think it is more likely than not that the MNB will be forced into further rate hikes, perhaps by around 100-200bps next year". Having said that, if the government can secure IMF assistance, "whether crisis-induced or not, we would not be surprised to see rate cuts". In 2008/09, rates were cut by 450bps within 12 months of accepting IMF assistance, Mr Jackson stressed.

JP Morgan’s London-based analysts said that the wording of the M% statement was "slightly less hawkish" than last month’s. "The bar for further rate hikes is higher in our reading of the statement, and our base case remains for rates to remain unchanged in coming months, assuming that formal talks with the IMF/EU commence in January and Hungary concludes a P-SBA (precautionary stand-by arrangement) in 1Q" next year.

However, "the main risk to our base case is the government’s refusal to back down from controversial changes to the central bank act", JP Morgan’s analysts said.