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Forint down on rate course uncertainty

EU

The forint was trading at 309.01 to the euro late Friday on the interbank forex market, down from 308.08 late Thursday. At 308.10 to the euro early Friday, the forint moved between 307.84 and 309.22, after it reached a more than five-week low at 310.37 on Thursday.

It is down 1.10% over the week after climbing 0.37% over the previous week. It is down 3.80% year-to-date after sinking 1.95% last year.

The Hungarian currency is at more than a month's low versus the euro after deeper-than-expected deflation data on Thursday boosted expectations of further base rate cuts by the central bank, a note from Commerzbank on Friday said.

"We see rates being cut another 40 basis points from here during H1 2015," a Commerzbank analyst told Reuters.

However, Hungary's policy rate is only 10 bps higher than that in Poland, and a cut from Hungary's already all-time low rate of 2.1% would push investors toward the Polish zloty, putting further pressure on the forint, Commerzbank's note added. But it expects the 310 to the euro level to be a strong resistance for now.

As price falls are deepening, "we cannot any longer rule out that the central bank will have to cut interest rates further going into next year," Danske Bank's Friday note said. Danske said its inflation models indicate that if the Hungarian central bank does not cut interest rates and ease monetary policy further, consumer prices will fall more than 1% early next year versus its 3% inflation target.

But some others are not convinced.

The bigger-than-expected annual consumer price decline in November will not be enough to sway the central bank into cutting rates at any time soon, a Bank of America Merrill Lynch economist said. Hungary's growth is solid while the economy is still to benefit from various stimulus measures by the central bank and the government. The ECB's easy-money policy also helps ease the need for near-term rate cuts in central Europe. Given its downward revisions to CPI forecasts on lower oil prices, BofAML now expects Hungary to keep its main rate unchanged at the current record low rate in 2015, pushing back its rate hike call into 2016.

No rate cut is warranted now, UniCredit also said in a note on Friday. Prices will continue to fall for most of 1H 2015 but accelerate to 2.3% annually by end-2015, making the real policy rate negative; rate cuts to-date have failed to bring the yield of longer-term government bonds, which mostly foreign investors hold, lower and more rate cuts are unlikely to do it; lending is not rebounding because of high borrowing costs but due to a lack of demand; the central bank's cost of providing two-week liquidity to banks will fall sharply in 2015 and be offset by an anticipated, gradual forint weakening. Still, Hungary's monetary policy will likely remain accommodative, UniCredit added.

The MNB will keep its base rate unchanged next week, a Reuters poll showed on Thursday.

A stronger euro in dollar terms supported the forint against the US currency.

The forint traded at 247.94 to the dollar, slightly up from 248.23 late Thursday. On Friday, it moved between 247.19 and 248.89, after a four-day low at 249.28 on Thursday. It was quoted at 257.28 to the Swiss franc, down from 256.10 late Thursday. Its range on Friday was 256.43 to 257.53, a more than one-month low.

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