MNB ‘far from a hike’, markets ‘overestimate’ rate hike risks, says City

MNB

Market participants "overestimate the dangers" of a near-term rate increase by Hungary's central bank to protect the currency, but a new IMF package would be "appropriate", London-based emerging markets economists have said.

Emerging Europe analysts at Morgan Stanley who have recently visited the region said in a summary note released in London that several investors compare Hungary's current situation to October 2008, when the MNB last hiked interest rates to support the currency.

However, "we think that (even) the central bank sees the situation as very different now compared to then ... true, the forint is even weaker, but the banks are stronger, the government bond market is functioning and the MNB has twice as (high) FX reserves to intervene if it has to".

This does not mean that the MNB will not hike rates in an emergency fashion under any circumstances. But a rate hike seems "quite far away", and would only come after a large increase in daily volatility and a steep move in HUF, rather than when a given level of EUR/HUF is crossed, Morgan Stanley's analysts said in the report.

However, "we continue to strongly believe that an IMF package ... would be appropriate to strengthen Hungary's defenses and reassure markets of access to funding and ability to support the currency".

That said, "there seem to be very high political obstacles to calling the IMF back in for the moment".

Should the situation deteriorate quickly and foreigners decide to sell government bonds - possibly as a consequence of a downgrade to non-investment grade in the coming weeks by one of the agencies -, "we think the MNB may have to step in and support the bond market", Morgan Stanley's London-based economists said.

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