NBH also decided to maintain its inflation target at 3.0% for longer run

This was widely expected by economists, but there are several questions about the longer-term outlook. The Governor’s press conference revealed that only one option was on the table, thus the voting was unanimous. The Governor also said that recent inflation data was in line with the June projection and that risks attached to the euro-zone crisis may affect the financial environment in Hungary. He also mentioned that the bank will keep its current 3% inflation target for longer run, suggesting that there was a proposal to lower it. This could mean that the bank sees the inflation outlook rather dovish.

It is interesting to see that the market has started to price in rate cuts and the 6x9 FRA now implies a 25bp rate reduction. This looks warranted from an inflation point of view, but such a step may also become risky if the euro-zone crisis worsens. We think that if the government submits a tight 2012 budget and inflation remains low in the coming months, there could be room for a 25bp rate reduction till the year-end.

Currencies in the region reacted positively to the improving sentiment on equity markets and exchange rates appreciated about 0.5% during the day. A weakening US dollar could be beneficial for the currencies as investors may look for high-yielding alternatives to the euro in order to make profit from such a trend and this may keep CEE currencies relatively strong.