Bottom line: Hungary’s central bank delivered a second 25bp rate cut in just four weeks to support the recession-hit economy. Taking into account the country’s external financing risks, which should keep rate setters somewhat cautious, further easing in the months ahead is likely to be limited. That said, much will depend on global financial market sentiment and the progress of negotiations over the IMF financing agreement. The importance of these factors on upcoming NBH decisions was also confirmed in the bank’s statement released yesterday. If global risk aversion were to return, Hungarian assets - including the forint and government bonds - would come under pressure again. As for negotiations with the IMF, there is in our opinion high chance the deal will be further put off, which might contribute to a rise in risk premia of Hungarian assets.
Considering the above factors, in our baseline scenario we continue to expect one more 25bp rate cut this year. However, taking into account the fairly dovish tone of the yesterday’s statement, in a less likely scenario of persisting positive market sentiment, 50bp more of rate reductions by NBH this year cannot be ruled out.
Hungarian central bank cut interest rates by another 25bp yesterday,after slashing them in August for the first time in over two years. The decision was in line with consensus and our expectation, however, it was again expected to be decided only with a narrow majority (as confirmed by governor Andras Simor at the yesterday's conference).
The new quarterly projection released yesterday pointed to higher inflation and lower growth trajectory compared to that seen in the June projection (for details see above). As NBH wrote in its statement, inflation is expected to meet the 3% target only in the second half of 2014.
According to the MPC statement, the bank’s easing stance was justified by: (1) the sharp deterioration in the economic outlook over the past quarter, amid a deterioration of inflation outlook, and (2) improvement in global financial market environment which, as a result, led to a significant fall in risk premia associated with Hungarian financial assets.
In its statement the MPC said it will consider further reduction in interest rates if the improvement in financial market sentiment persists and medium-term upside risks to inflation remain moderate.
The yesterday’s decision was in line with consensus and priced-in by the market, thus the negative impact on forint was limited (EUR/HUF was at 283.6 at 4.20 p.m. CET vs. around 283.0 at yesterday’s closing).
Hungary, Policy rate (Sep): 6.50%
Previous (Aug): 6.75%
Consensus: 6.50%, KBCS forecast: 6.50%
Latest forecasts from the bank’s quarterly inflation report:
CPI 5.8 (5.3) 5.0 (3.5)
GDP -1.4 (-0.8) 0.7 (0.8)
*figures from previous projection in brackets