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MNB to stay put on Monday, but easing edging closer, City says

  Hungary’s central bank (MNB) will likely continue to hold its fire on Monday but the start of an easing cycle is now edging closer, with the first interest rate cut potentially taking place by year-end, London-based emerging markets analysts have said.


Prior to the Monetary Council’s rates meeting Monday, Barclays Capital said that the combination of 100bp rate hikes this year and the appreciation of the forint, even after the weakening in recent weeks, imply a significant tightening of monetary conditions. This should ease the MNB’s inflation concerns, and “we expect a first rate cut of 25bp by year-end and the rate to fall to 7.00% by end-2009”.

The combination of low growth and softening commodity prices should help to reduce inflation pressures further. Oil prices have fallen significantly below MNB’s baseline assumption of $137/b and the output gap is widening further. This should, ultimately, raise firms’ resistance to continuing wage hikes, Barclays Capital said. In a separate forecast, Merrill Lynch said on Friday that Hungary’s economic growth is running well below potential, and while it’s expected to rebound somewhat in 2008 the underperformance is likely to continue, with Merrill Lynch expecting a 2.1% GDP growth versus 1.3% in 2007.

Inflation remains “stubbornly high”, but is largely boosted by a combination of commodity price shocks and one-off distortions, and there are early signs of underlying disinflation. Given the large negative output gap, some -2% of GDP, the strong forint and favorable base effects, the headline CPI inflation is set to gradually fall towards 4% next year, with the more pronounced descent likely to start in September/October 2008, Merrill Lynch said. “We see interest rates at 8.50% at end-2008 (but) expect the MNB to shift to the easing mode over the next 6 months and cut rates by at least 100bps, to 7.50%, in 2009”, it added. Goldman Sachs said the Council will likely remain “in wait-and-see mode” on Monday, but rate cuts “are coming closer”.

The MNB is still worried about high wage growth and potential further weakening of the forint in a volatile global environment, but some Monetary Council members have started to pay more attention to the tightening of lending conditions to corporates by banks, which may have an adverse impact on growth, a potential argument for easing sooner. “We expect the rate cutting cycle to start at the beginning of next year”, GS said. (MTI-Econews)