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MNB may spring rate 'surprise' next week amid global turmoil, says City

Hungary's central bank may spring "a surprise" at the Monetary Council's rate-setting meeting next Tuesday on the back of euro contagion risks and a relentless turmoil on global markets, London-based emerging markets economists said on Friday.

Analysts at BofA Merrill Lynch Global Research, the London-based financial research unit of Bank of America-Merrill Lynch, said they believe the MNB should remain on hold, but "exceptionally high uncertainty" about global conditions and the unfolding of the eurozone crisis imply that "a surprise outcome cannot be ruled out".

"We believe the majority of the board will vote in favor of keeping rates unchanged, but the growing contagion risks from the eurozone situation and increasing MNB inflation forecasts imply the board will have a heated debate on whether rates should be lifted or not".

Emerging markets economists at Barclays Capital, another major City-based investment banking group, said on Friday, however, that during their recent visit to Budapest the MNB insisted that recent HUF weakness "did not imply a replay of October 2008", when rates were hiked by 300bp amid a HUF sell-off and just before IMF emergency lending was secured. "The MNB argued that excessive short-term volatility would be better addressed via FX intervention and that temporary HUF weakness would not immediately affect balance sheets, which have adjusted since 2008".

Even with HUF having touched 300 against EUR, "we believe the MNB is still far away from any emergency rate hikes", Barclays Capital's London-based analysts said.