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MNB rate hike 'may do little' to stabilize markets, says City

The MNB is "once again" considering the option of raising interest rates despite "a rising probability of recession" but emergency rate hikes this time "may do little" to stabilize the situation and could actually be counterproductive, London-based emerging markets analysts said on Tuesday.

In a report released to investors in London, BofA Merrill Lynch Global Research - a London-based economic and financial research unit of Bank of America-Merrill Lynch - said that rather than rate hikes, "we believe Hungary urgently needs better internal dialogue, closer cooperation with the EU partners and a precautionary IMF deal".

Amid increasing evidence of rising risk aversion the MNB is once again signaling the possibility of raising interest rates to stabilize the currency. In the past, this strategy proved quite effective. However, in the past the problem was primarily domestic in nature and in 2008 the 300bp emergency rate hike was followed by a $25bn rescue loan from the IMF and EU.

This time, "we believe conditions have changed enough to make rate hikes in the near term a suboptimal strategy". As a result, "we maintain our central scenario for unchanged policy rates in the near term".

That said, "we acknowledge that if events in the eurozone continue to unfold in a disorderly way the MPC will go ahead with an emergency 50-100bps rate increase", BofA Merrill Lynch Global Research said.

A precautionary agreement with the IMF, similar in spirit to what Romania has or the FCL line Poland has put in place would help mitigate investors' concerns about fiscal execution, thus reducing the risk of sharp bond outflows, the report added.