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HUF weakness may trigger ‘defensive’ MNB rate hike as early as Tuesday, says City

The sharp sell-off that drove the forint to lows against the euro not seen for more than a year may pressure the MNB into a "defensive" rate hike at Tuesday's Monetary Policy Council (MPC) meeting, London-based emerging markets analysts said on Monday.

In a note released to investors in London, Capital Economics said that the bigger concern for policymakers is the threat to financial stability, rather than inflation, posed by a weaker forint.

"We had penciled in a 50bps cut in interest rates ... in Q1 next year – a move that is now priced into the markets ... But with the forint now trading at its weakest level against the euro for 14 months, any move in the next three months is far more likely to be up than down".

Indeed, the "chance of a defensive rate hike of 50bps or so at (Tuesday's) MPC (meeting) may now be as great as 50:50", Capital Economics said.

The broader consensus in the City calls for the MNB to keep its 6% policy rate on hold until the end of this year and, increasingly likely, well into 2012.

London-based analysts at Goldman Sachs said that concerns over the HUF level, large reliance on foreign funding and the situation in the Eurozone, rather than inflation and growth outlook will dominate the M% meeting on Tuesday.

"We believe the MPC would ... need to see a lasting solution to the FX debt problem, one that does not endanger the stability of the banking sector, to feel comfortable about rate cuts", they added.