The National Bank of Hungary left rates unchanged, with the 14-day repo rate at 8%. Although, according to Governor Zsigmond Járai, the NBH Board discussed a rate hike by 25 basis points, a significant majority of members were in favour of leaving rates unchanged. As markets had anticipated this decision, it did not trigger any significant market reactions.
The release of the new Inflation Forecast by the NBH was more interesting. The central bank now expects a worsened inflation outlook in the short term and a faster price fall next year. The NBH predicts that inflation should accelerate up to 9% in the second quarter of this year (we as well as most analysts believe that inflation may hit a high as early as March this year). The NBH explains the higher than the originally expected short-term price rise in its Report by the availability of more accurate data on the rise in regulated prices and the restructuring of the subsidy system. On the other hand, just as we expected, the bank says that the faster inflation fall is due to the strong forint and lower commodity prices on global markets. Central bank predictions now indicate that inflation might fall to the target 3% as early as the third quarter of 2008 (this is a significant change in central bank’s opinion compared to the previous forecast because in November the NBH predicted that inflation would exceed the target value for the whole of the forecast period, i.e. by the end of 2008). We forecast that inflation may approach 3% slightly later. Yet we consider the end of 2008 a realistic date for hitting the inflation target.
Although the new Inflation Report also points out some inflation risks, we believe that rates have already reached a high and another rate change will be a rate cut in the second half of the year. If actual developments meet central bank expectations, rates may fall to as low as 7% by the end of this year. The new composition of the NBH Board will also help cut rates faster. Governor Járai, whose mandate expires as early as this Friday, will be replaced by András Simor, who should be more neutral. More central bankers, namely Henrik Auth and Péter Adamecz, who are considered hawks, will leave the Board on July 2 and will not be replaced. Thus the MPC will shrink from 13 to 11 members.