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Greek turmoil may hit forint, bonds

While officials say the economy is braced against the worst, analysts say one impact may be a premature end to the MNB’s current monetary easing.

As the world watched and waited for events to unfold in Greece, government officials said the Hungarian economy is already braced against aftershocks, while analysts said that a prolonged Greek debt crisis might bring an end to the current rate-easing cycle being pursued by Hungary’s central bank.

Economy Minister Mihály Varga said that Hungary’s “exposure is fairly limited”, but the situation could have negative impacts on the forint and other emerging-market currencies, as well as impacting the yield on state bonds. (See story on this page.)

As for the forint exchange rate, it has already seen some volatile movement. Global financial markets reacted positively to the latest news and that helped Hungary’s forint regain some strength, but basically it remains stuck near five-month lows versus the euro. Erste analyst Gergely Ürmössy expects a weak forint until the end of this year.

He also forecasts that the National Bank of Hungary will continue its easing cycle. “I still think the base rate will be reduced to 1.2% by the end of the third quarter of the year,” Ürmössy told the Budapest Business Journal. “However, more cautious moves are expected from July; I see a 10 basis point cut rate from then on. If inflation remains depressed, and international investor sentiment improves, it leaves room for the Monetary Council for easing again in August and September. In case the Greek debt crisis persists with prolonged negative market effects, then the Monetary Council might decide to cease the easing cycle it started in March,” Ürmössy concludes.

Lodon-based analysts agree: in a note released on June 29, they concluded that the Monetary Council might end its easing cycle if market risks deepen. However, tightening is not expected before the year-end, they said. According to Erste’s Ürmössy, the earliest possible date for raising the base rate is the second half of 2016.

Hungary’s government has built safeguards into next year’s budget against the possible impact of the Greek situation, state secretary for fiscal affairs Péter Benő Banai said on public television late on Monday (June 29). This is why the 2016 budget contains more than HUF 200 billion of reserves, and there is some HUF 130 billion left from this year’s budget, he added.