Hungary's central bank is set to hold on to its 6% policy rate at its rate-setting meeting on Tuesday, but the weak forint and deteriorating external risk indicators mean that a rate hike is more likely in the longer run than a rate cut, London-based emerging markets economists said prior to Tuesday's rates announcement.
Analysts at JP Morgan said they see "a greater chance of a hike than a cut in coming months", and expect a rate hike to be discussed again on Tuesday.
"But the bar for any rate move remains rather high, in our view". Comparing the current situation to October 2008 when the MNB delivered an emergency rate hike, the forint is weaker, but banks are better capitalized, the government is less reliant on external financing and the central bank's FX reserves have doubled.
With CHF/HUF now broadly stable, "we think the MNB will be more tolerant of a move higher in EUR/HUF, with short-term FX volatility likely to be dealt with FX intervention".
Hungary’s vulnerability to FX swings could be materially reduced by mid-2012 if the government's policy of getting FX borrowers to switch into HUF loans is successful, opening the door to rate cuts. But until the FX loan stock is reduced the MNB will remain wary of doing anything to weaken HUF.
"Our base case is for 50bp in rate cuts in (the second half of 2012)", JP Morgan's London-based analysts said.
Emerging markets economists at Goldman Sachs (GS) said in their forecast that the MNB "remains bounded in its policy choices, as it has been for most of this year".
On one hand, it remains in a "currency trap": even though stagnant domestic demand and the ongoing deleveraging would call for lower interest rates, cutting rates in the environment of heightened uncertainty over the effects of the FX debt prepayments, uncertain situation in the eurozone, high dependency on foreign financing and a record high presence of non-residents in the domestic debt market mean that the MNB cannot afford more HUF weakening without additional negative consequences for domestic demand and thus growth.
On balance, therefore, the MNB is likely to stay on hold for now and "well into 2012" if the current situation of still large uncertainty over the resolution of the eurozone's fiscal and banking problems persists but remains under control and does not lead to a rapid outflow of capital from Hungary or a reduction in bank exposure to the country.
Similarly, "unless we see a rapid sell-off of the forint and a spike in HUF volatility", the MNB is unlikely to counteract with "emergency" hikes, GS's analysts said.