Hungary Ahead Of A Series Of Rate Cuts - But Only Next Year

All of the 13 respondents believe the Monetary Council will take up a wait-and-see stance for now in respect of rates. If the forint, however, remains strong and oil price changes do not ruin inflation prospects, next year's cumulated rate cuts could be 100-125 basis points, more than the consensus forecast showed a month ago.

The MPC will hold its monthly policy meeting next Monday. The base rate has been unchanged at 8.50% since May. Parallel to the announcement of the rate decision, the NBH will also release its August Report on Inflation.

Every analyst in Portfolio.hu's poll said the MPC will leave the benchmark rate on hold on 25 August, but there is a huge split among respondents whether the rate-setting body will have the opportunity to deliver one or two 25-bp cuts by the end of the year or not.

Seven of the respondents said (see the table at the bottom for details) the NBH could refrain from launching a rate hike cycle by early 2009, but the answers project quite an intense series of monetary easing. According to the consensus, the base rate could be lowered to 7.25-7.50% by year-end. 

Given the likely start of monetary easing, we have asked the economists whether the NBH staff will modify its prognoses on 2009 and 2010 annual average inflation in its Inflation Report or not.

The general view of the respondents is that there will be no change to the forecasts (4.2% for 2009 and 3.0% for 2010) or that these will be lowered by a few tenths of a percentage point.

This assumption stems from the fact that the NBH staff compiled its latest report assuming EUR/HUF of 253.8, while the currently used value could be around 231.1. Consequently, the nearly 9% appreciation of the euro and its inflation dampening impact could have (over)compensated for the rise of oil prices that came in much higher than what the NBH staff assumed for its projections (USD 106 and USD 104/barrel). In July, the price of crude hit an all-time high above USD 145 a barrel, although it has came down a lot since then.

At the same time, a January VAT hike, hinted at by the government, would considerably redraw the outlook on inflation, emphasised János Samu , analyst at Concorde . Still, the details of the oncoming tax package are so obscure that analysts were unable to factor them in into their forecasts for now.

“Based on the inflation path, CPI could moderate to around 3% on the 5-8 quarter target horizon (in 2010), but upside risks will probably put the central bank on a wait-and-see mode," said Eszter Gárgyán , Citibank 's Budapest-based analyst.

Mariann Trippon of CIB Bank concurs, saying the NBH “may settle in for unchanged rates in the months to come."

“The strong forint and the expectedly negative output gap both in 2008 and 2009 do help push down inflation, but regulatory price increases to be realised in the summer/autumn and a VAT hike in scope of a possible tax reform carry upside risks," said Gábor Dunai , analyst at OTP Bank . “On the other hand, wage statistics continue to signal inflation expectations are being stuck at high levels, so for the time being I would not find any rate change justified."

As the 3% inflation goal seems achievable by 2010, there is no pressure on the NBH to act now, said Gergely Forián Szabó , investment director at Pioneer Fund Management . He believes the first cautious monetary easing could come around the end of the year when there can be no question about declining inflation and oil prices move to lower territories, as well.

Zsolt Kondrát, senior analyst at MKB Bank , expects his base scenario, i.e. 8.00% benchmark rate to materialise this year, provided the aforementioned conditions are in place. Hungary's base rate started this year at 7.50%.

Due to the several upside and downside inflation risks, it is not surprising that some analyst project only a 6.50% base rate for end-2009, while one economist forecasts 7.75%. The consensus forecast (median of the projections) is 7.25-7.50%, which gives us a more intense monetary easing than the tightening delivered this spring, i.e. a cumulative 100 bps to 8.50% from 7.50%. 

Gábor Orbán, fund manager at Aegon Investment Fund Management, projects the most intensive rate cut cycle for next year. “The global environment will be beneficial for Hungary's disinflation and the deceleration (of consumer price increase) will make its impact felt more and more. Unless there is a dramatic rise in risk premium - and there is emphasis on this “unless", that is why the NBH has a tough job in its strategic communication - rates will be reduced considerably," Kondrát said.

Nicholas Kennedy, analyst at 4Cast in London, sees the end-2009 base rate at 7.75%.

“We're looking for rates to be left on hold at the August meeting, although there are some tentative signs of improvement the inflation picture overall is still subject to too much risk to begin considering reverting to an easing stance underlined by the strong wages print this morning."

In terms of CPI there remain ongoing pressures from energy prices with gas, heating and electricity prices just about to react to the past increases of oil. Processed food prices should also stay elevated and even if base effects for transport/fuel cool the headline inflation in the coming months, there is little room for complacency with the prolonged CPI hump," Kennedy noted.

Nigel Rendell, analyst at the Royal Bank of Canada in London, sees interest rates on hold at least for the next two to three, projecting the next move to be down, “with the exact timing of a cut (late 2008/early 2009?) now more dependent on real economy rather than the inflation data."

For the end of next year, his call is for a benchmark rate of 7.50%. “As the industrial and trade side of the economy weaken the NBH should be able to cut rates by 25bp per quarter in 2009," Rendell said."

Source: Portfolio Online Financial Journal