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Rates prospects torn between slump and forint stability

Forecasts by City-based analysts for Hungary's monetary path going forward seem to be torn between factoring in the steep slump in the real economy and forint volatility, with rate cuts and rate hikes both appearing in possible future scenarios after the Central Bank (MNB) opted for rates on hold.

Neil Shearing, Central European economist at Capital Economics in London told Econews that maintaining financial stability would call for rate hikes despite the economy being in “dire straits.” On the other hand, the “complete collapse in real activity” should lead to rate cuts.

On balance, interest rate cuts will come in the end, “perhaps not in this quarter but in the next” as the economy is set to shrink by about 7.5% this year, Shearing said. “Such is the scale of the unfolding downturn that ... interest rate cuts will be needed,” he added.

Predicting a 7.5% slump, Capital Economics is at the most bearish end of the forecast range for the Hungarian economy in the City, with other forecasts typically ranging between 4.5% and 6% recessions.

Wike Groenenberg, emerging markets director at Citigroup in London told Econews after the Monday rates decision, however, that Hungary's future monetary path “entirely depends on the currency.”

“If anything, the risks are for euro/forint to go higher and therefore the risks are for the central bank to actually hike rates in the next months,” she said.

If euro/forint will trade back up in the 310-320 range, the majority of the MPC members are likely to be in favor of a rate hike.

However, the deciding factor is not the exchange rate range itself as the forint have been in this range without triggering a monetary tightening, but also how much time the forint would spend at these levels, she added. (MTI – Econews)