Hungary's CPI profile is not likely to pressure the central bank into a rate hike anytime soon, and the persistently weak economic fundamentals would even justify further easing if the forint stays its ground against the Swiss franc, the main funding currency of the “huge” FX debt exposure amassed by Hungarian households, London-based emerging markets analysts said after the MNB left the 5.25% base rate unchanged at its Monday meeting, in line with the consensus.
JP Morgan said after the announcement that it remains of the view that the MNB will keep rates unchanged this year and probably through the first half of 2011.
Inflation is likely to remain above the central bank's 3% target “for the foreseeable future” - rough estimates suggest the additional taxes imposed on several sectors add up to 0.3 percentage point to 2011 CPI.
Yet, the overshoot stems primarily from supply-side factors, while underlying inflation pressures remain muted. Also, it appears that the pass-through from recent forint weakness to inflation has been smaller than expected.
“In our view, above-target headline inflation is not sufficient to justify a rate hike until the economic recovery becomes more established”, JP Morgan said.
In a separate comment, TD Securities said, however, that Hungary's recovery "clearly" remains fragile and the weakness of domestic demand would even support further easing, provided inflation remains on a downward trajectory and the currency holds against the euro and the Swiss franc.
“In the overall balance of pros and cons”, the bank is still likely to assign the utmost importance to the exchange rate stability, given the huge exposure of Hungarian households to FX loans. In particular, as the largest portion of these loans is denominated in CHF, the MNB might be willing to hold rates higher than the current status of the economy would require to avoid a collapse of the forint against the CHF and the likely consequential explosion of loan defaults domestically, TD Securities said.
Recently, however, the forint has stabilized and even appreciated versus the EUR and CHF. “This is a favorable starting point for the MNB to consider an extra rate cut, which we expect to take place in Q1 2011 if current conditions hold ... as of now, we expect the MNB to cut rates by 25 bps to 5.00% early next year, then to hold rates unchanged throughout 2011”, it added. (MTI – Econews)