Forint corrects further down on interbank market

A deeper than expected fall in Hungarian inflation further into negative territory in January pushed the forint down through increased expectations for policy rate cuts, and held back other Central European currencies as well, while investor caution due to the Ukraine peace talks and the Greek stalemate also weighed.

In the wake of Hungary's January inflation rate, a policy rate cut in March is "a done deal," BNP Paribas said. It forecast the National Bank of Hungary (MNB) policy rate at 1.50-1.75% by mid-year versus the current record low level of 2.10%. The house also expects the central bank to opt for a larger than 10bps move in March, perhaps cutting more than 25bps in one go.

Hungarian disinflation provides room for the rate cuts, while the ECB's quantitative easing program facilitates a backdrop for lower rates in Central Europe generally, Societe Generale said in a note on Wednesday, also expecting a 1.5% floor for the base rate by May.

Hungarian forward rate agreements are pricing in 30-40bps points of cuts in the central bank's base rate in the next few months, with the first expected in March, traders said on Wednesday.

However, after initial falls, Hungarian sovereign yields were up 2 to 8bps on the day along the curve by afternoon on the secondary market -- except the three-month tenor with a 1bps drop -- reflecting investors' caution as well as increasing the risk premium lure of the papers to first-rated sovereigns with falling yields.

And it also reflects that views are far from unanimous on the expected rate cut.

Citigroup penciled in a minor 10 to 20bps rate cut for March with a cumulative cutting of between 30 to 50bps this year. The central bank is likely to stick to a cautious stance, trying to avoid excess forint volatility as the Fed is expected to begin to raise rates later this year. The Hungarian central bank's Funding for Growth scheme is likely to become the primary tool for monetary easing, Citi said.

But Hungary is far from deflation according to "textbook" as disinflation is driven only by a select range of items such as fuel and food, Erste Bank argued, adding that the big-rate-cut scenario is largely subject to the government's plan to cut utility prices further this year.

A survey of the MNB, also out on Wednesday, showed that underlying measures of inflation -- core inflation minus selected items -- remained comfortably in positive territory despite minor falls in January.

Hungary's economy ministry also emphasised in a statement on Wednesday that Hungary's core inflation remained in positive territory which signals that there is no deflation threat in the economy.

This suggested the government was not breathing down the MNB's neck for rate cuts. So, given that the government has expressed earlier that low prices were the mainstay of its policy, and that the governor of the MNB is a long-time political ally of the prime minister and most monetary council members are not independent from the central bank, some analysts advise caution in pondering the chances of deep rate cuts in order to accelerate inflation.

The forint traded at 273.50 to the dollar, down from 272.70 late Tuesday. On Wednesday, it moved between 272.45 and 275.09, not far from a ten-day low at 275.55 on Tuesday. It reached a one-month high at 265.81 last Thursday.

It was quoted at 295.17 to the Swiss franc, down from 294.40 late Tuesday. Its range on Wednesday was 294.00 to 296.74, after a nine-day low at 297.62 on Tuesday. Last Friday, at 287.52, it reached the highest since its crash to an all-time low at 378.49 on January 15, when the Swiss central bank scrapped its cap of 1.20 to the euro.