The deteriorating inflation outlook is set to trigger Hungary's central bank to switch to a more hawkish stance and a rate hike is now more likely than a cut, London-based emerging markets analysts said on Monday.
In a report released in London following a visit to Budapest, analysts at Morgan Stanley said it is clear that the assumptions in the latest inflation report on the currency in particular (EUR/HUF around 265 and EUR/USD at 1.34) are "already well out of date".
Even with the future oil curve lower than it was in May, "we believe that oil prices in 2011 in HUF terms (will be) 5% higher, and of course the impact of a weaker HUF on tradeables inflation will be high".
The lower consumption outlook as a result of the spike in mortgage payments due to the sharp CHF appreciation will provide some offset, but the overall impact on the inflation forecast is to push the 2011-12 profile higher, Morgan Stanley said.
By the time of the next inflation report, the MPC could be facing a weak economy and above-target inflation, "a difficult combination". The move to a tightening bias may well be an option. And "while not our central case - we see rates on hold until 2H11 -, a rate hike seems more likely than a rate cut, especially given the risk environment and the fact that we don't really expect the HUF to rally meaningfully from here", the report says.
In a separate emerging markets comment, JP Morgan said that the MNB's tone is likely to turn more hawkish.
"We believe that Hungary's easing cycle is over, with the next move likely to be a rate hike in 2011".
Yet, if HUF were to weaken further on a sustained basis, "we think the MNB might consider FX intervention, not least because FX reserves have doubled since the autumn of 2008 ... in our view, rate hikes are less likely to be used as a stabilization tool now than prior to the autumn of 2008, when Hungary did not have the backstop provided by the IMF/EU loan", JP Morgan said. (MTI-ECONEWS)