The event of the day will be the rate setting meeting of the central bank. The NBH is expected to continue the tightening cycle, which was started on June 19 when the bank raised rates by 25bp to the current 6.25%. The NBH reacted to inflationary pressures, stemming from weak forint and the fiscal package, which, according to estimates of the Finance Ministry, will lead to inflation of around 5-6%, while the NBH sees it coming in at 6-7%.
Our view: We expect the NBH to raise rates by only 25bp. The bank announced earlier that it would raise rates gradually, and since the forint has gained in the last couple of days, and substantial slowdown in GDP growth is expected to come in 2007, we believe that the NBH will not be willing to speed up the tightening cycle. Our expectations are in line with the market as a 25bp hike is priced into FRAs. The bank’s comments will be closely watched by the market, as it may give further signals over the future pace of tightening.