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Hungary central bank next rate move is a cut, City analysts say

The next interest rate decision of the National Bank of Hungary is likely to be a rate cut, London emerging market analysts said on Wednesday, although there are analysts disputing this forecast.

Capital Economics, one of the major London financial investment and consulting groups, said the Hungarian economy has turned the corner, though its recovery remains fragile and conditions in the consumer sector remain dire, with unemployment at 11.5% in February, while wage growth remains very slow as well. Against this backdrop, it is no surprise that annual retail sales growth is only just edging into positive territory, Capital Economics said.

The increase in inflation appears to be due to a pick-up in processed food inflation (which is not excluded from the core measure, but is related to the spike in global food prices). Given the degree of slack in the economy, underlying inflation pressures should remain subdued for some time, the group said. "We still think that the next move in interest rates will be down," Capital Economics concluded.

The current forecast of the JP Morgan bank group's London-based emerging market analysts is, in contrast, that the next interest rate move of the NBH will be an interest hike, and the most likely time is the fourth quarter of this year. The basic scenario of JP Morgan's analysts is that the base rate will be raised to 6.25% by the end of 2011 and to 7.00% in 2012 from the current 6.00%.

The London emerging market analysts of the Morgan Stanley bank group are maintaining a similar forecast, predicting that the base rate will rise to 6.25% in the fourth quarter, reaching 7.00% by the third quarter of 2012, to end next year at that level. Morgan Stanley analysts say the bank's raising interest rates is more likely that its cutting rates because of the NBH's continued focus on inflation.

However, Capital Economics said in its latest analysis on the European emerging market region that every new phase of the euro zone crisis is making a "smaller impact" on CEE markets. Most CEE currencies have appreciated to the euro over the past month, credit default swap premiums have generally fallen, equity markets have continued to strengthen in most countries of the region, in spite of ongoing turbulence in the euro zone periphery, the analysis said.

Capital Economics said that it would be tempting to conclude that the euro zone crisis no longer influences CEE markets. If, however, the euro crisis enters a new, more dangerous phase, which the company's analysts consider quite possible, it is difficult to imagine that the European emerging market region could stay outside of the limelight for a longer period, Capital Economics said in its analysis on Wednesday.