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Trading band scrap to increase Hungarian monetary patience

Hungary's central bank may react more slowly to forint volatility after the decision to abandon the forint trading band, a major City-based investment bank said.

In a comment released in its daily emerging markets update, Barcalys Capital said that despite the initial strengthening of the forint, the shift to a free-float regime does not affect its baseline view of the forint being around 265 on a 1-3 month horizon, as the fundamentals behind the currency’s weakness remain in place. “If anything, the balance of risks is tilted towards even more forint depreciation than our baseline scenario now that the (Monetary Council) has indicated its preference to be a bit more ‘hands off’ with the exchange rate.”

In case of further prolonged forint weakness (above the 270 level), the central bank (MNB) may still be forced to hike interest rates to anchor inflationary expectations, as there is around a 40% pass-through from FX to CPI over four quarters, compared to 20%-30% for Poland. However, “we think even if this happens, the MC reaction to FX changes should be slower than in the past ... we would expect the MC to take cues from its neighbors in viewing FX depreciation as a ‘cost shock’ and reacting only if it sees evidence of second-round effects to inflation from the shock.” This should mean more gradual shifts in monetary policy, Barclays Capital said.

Other London-based emerging markets analysts said after the MNB announced earlier this week that it had left its rates on hold and agreed with the government to eliminate the forint band that the timing of the move was “perfect” but the central bank is still likely to have to raise its interest rates to rein in a stubbornly high inflation. (MTI-Econews)