Inflation, risk dynamics warrant


Hungary\'s inflation outlook and risk dynamics suggest that Hungary\'s central bank should conduct a more cautious monetary policy, London-based analysts said on Wednesday.

The Monetary Council voted for a 25bp rate cut on Tuesday, lowering the bank\'s policy rate to 6.50% after a similar easing in August.

In its Daily Currency Briefing report released to investors in London on Wednesday, Commerzbank said that without an IMF agreement the Hungarian risk environment is facing \"constant headwinds\" caused by the unsolved crisis in the eurozone. \"This could quickly turn into a storm\" should politicians be unable to agree on a way of solving it.

\"What makes matters worse\" is that Hungary\'s inflation outlook was raised notably in the MNB\'s new inflation report which means that Hungarian inflation will remain above the target of 3% until at least 2014.

\"That should really make it increasingly more difficult for the four doves on the MC to implement rate cuts ... But as (Tuesday\'s) as well as the August meeting have demonstrated, the majority of the MPC does not respect such fundamental considerations, (and thus) further rate cuts down to 6.00% until year-end have to expected\".

That is \"not good news\" for the forint. \"Only once there is green light at the end of the IMF negotiations tunnel is EUR-HUF likely to move away from levels above 280 on a sustainable basis\", Commerzbank\'s analysts said.

London-based economists at Goldman Sachs said that the external MC members \"placed less weight than we would have thought\" on the revised MNB macro outlook which showed significantly higher medium-term inflation \"and which, in our view, called for a more cautious approach to rates\".

\"We continue to expect the MPC to cut rates to 5.50% by end-2013, as long as market conditions allow ... However, we continue to see fundamental risks to the forint in the medium term, due to high FX leverage, high external funding needs, the large presence of foreign investors in the local debt market, and structural growth problems\". These limit the scope for total easing, especially in the absence of a new financing agreement with the IMF and the EU, analysts at Goldman Sachs said.

The second consecutive tight vote for a rate cut has also raised concerns in the City about a potentially deepening rift within the MPC.

Analysts at 4cast, a major London-based global financial consultancy said after the rate cut was announced on Tuesday that the \"slim majority\" mentioned by MNB governor András Simor at his press conference suggested another 4:3 vote, the second in a row, \"indicating a worsening conflict within the MC\".

The last two rate decisions have made it clear that \"the four external MC members have decided to take up the conflict with the internal members and seemingly with the staff of the MNB as well ... The deepening and more and more hostile conflict within the MC should worsen Hungary\'s risk metrics, allowing a stronger reaction both on the longer dated bond market and on FX markets if the external backdrop turns more adverse\", 4cast\'s analysts said.

London-based economists at Morgan Stanley also said that \"the rift in the MC keeps deepening, which is a worry to us\".

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