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MNB to press on with easing amid benign risk backdrop, says City

Dovish external members of the Hungarian central bank's monetary policy council are likely to push through another 25bp interest rate cut at the bank's rate-setting meeting on Tuesday as the benign risk backdrop of HUF assets has held out well since the rate cut last month, London-based emerging markets economists said.

Analysts in an Econews poll among major investment banks and financial consultancies in the City were unanimous in their calls for a continued easing cycle which, to date, has brought the base rate of the MNB from 7.00% to 6.50%.
Emerging markets economists at Goldman Sachs said the market conditions suggest that the MPC, "more precisely the external MPC members", will support another cut on Tuesday. Since the September cut, bond yields have narrowed even more and the improvement in the CDS spread has been "very strong".
Government bond auctions have been generally successful and successful international issuance by a few sovereigns with low credit ratings strengthened expectations that Hungary could easily raise funding in the Eurobond market.
This improvement in market conditions suggests that the currency or funding prospects would not come under undue risks if the MPC were to cut again, even if prospects for reaching a new IMF agreement are delayed even further and the relationship with the EU becomes more strained as the Commission and Hungary disagree on how Hungary can reach its 2013 deficit goal.
"We expect the MPC to cut by 100bp more and bring the base rate to 5.50% in the next 12 months", analysts at Goldman Sachs said. Emerging markets economists at Morgan Stanley said that "there will clearly be a level of inflation at which even MPC doves will stop and once again reassess whether easing is reasonable".
Yet, even in September, with a baseline CPI forecast "definitely not consistent with monetary easing", MPC doves chose to focus on growth instead. "We think that [...] a narrow majority of the MPC will continue to push for rate cuts, and we expect a 25bp cut on Tuesday [...] We continue to see rates trough at 5% by next summer".
Analysts at JP Morgan said that a further decline in risk premia on HUF assets since the September MPC meeting makes another 25bp rate cut on Tuesday likely. The conditions for a cut set out in the last MPC statement look to have been met. CDS spreads are over 100bp tighter since the last meeting and bond yields have declined another 50bp. Headline inflation at more than double the target is not supportive of rate cuts, but the September CPI print was actually lower than MNB staff projections and is largely due to supply shocks which the MPC is inclined to look through, JP Morgan's London-based economists said.