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NBH policy rate “at 9% in three months”, City says

Hungary’s central bank will need to raise its policy rate aggressively, by up to 150bps to 9% in the next three months, if it is to come close to meeting its 3% CPI target next year, a major City-based investment bank said on Friday.

In its weekly “New Markets Analyst” report focusing mainly on emerging Europe, Goldman Sachs (GS) said that this year is crucial for the inflation-fighting credibility of the National Bank of Hungary. The central bank is not expected to change the inflation target of 3%, even though there has been some speculation that it will. But if it wants to be close to the 3% inflation target in 2009, it needs a significantly stronger exchange rate than the current levels, ideally “something around 240”, and at the moment this can only be achieved with significantly higher rates, GS said. In what is seen as one of the most aggressive monetary tightening forecasts in a highly fragmented City-based analyst community whose views are often at odds even about the direction of the next rates move by the NBH, Goldman Sachs said the most likely scenario is that Hungary’s central bank will need to raise interest rates by 150bps to 9%, in three consecutive 50bps steps in the next three months. In order to build credibility, the NBH may even opt for a larger initial move at the next meeting.

Therefore, “we change our 3-, 6- and 12-month interest rate forecast to 8.5%, 9% and 9%, from 8% flat ... our interest rate path is about 50bps higher than the market is pricing now”. However, GS leaves its exchange rate forecast unchanged at EUR/HUF 260, 250 and 245 on a 3-, 6-and 12-month horizon as it expects the NBH to be able to achieve a gradual appreciation of the currency, with “the better current account fundamentals providing a good basis for this”. In recent months inflation risks have clearly increased in Hungary, as elsewhere in the region, mainly because of global factors, with grain prices up by about 25% just since the beginning of 2008, and oil prices up by about 7%.

In the case of Hungary, this is exacerbated by the forint weakness and by the fact that expectations are very likely to be less well anchored than in other countries in the CE region or in major economies, the report says. Inflation forecasts have had a recent tendency to creep up by 25bps every quarter in Hungary, which does not help credibility, even if the problem is not unusual globally these days, it adds. (MTI-Econews)