The NBH to keep its base rate unchanged

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Czech Governor Singer’s comments support the koruna

The NBH to keep its base rate unchanged

Yesterday, Central European currencies moved in different directions. While the Hungarian forint eased ahead of today’s central bank’s meeting, the Czech koruna together with the Polish zloty firmed. Surprisingly, the otherwise stable Czech koruna recorded biggest gains. The sentiment on European markets was improved by better-than-expected German Ifo index; however the koruna was further supported by the statement of CNB’s governor Singer. Following Friday’s dovish comment of ECB governor Draghi, Singer said that the Czech Republic would benefit from further monetary easing in the euro-zone. According to Singer core producer price and improving job market are signalling an upward pressure on inflation. Nevertheless he reiterated CNB’s commitment to keep its intervention policy until 2016.

Today, the attention in the region will be paid primarily to the rate-setting meeting of the Hungarian central bank. Although inflation remains negative and positive international sentiment gives room for the NBH to loose the monetary policy further, we believe that before the end of the year rates will stay unchanged. One reason for the NBH to keep its commitment to keep rates on hold is the public debt, which has to be kept below last year’s level of 77.2% of GDP. As the foreign currency denominated portion of the public debt is still high (around 38%) exchange rate level by the year end matters. Hence, the NBH may not risk weakening of the currency driven by a surprise rate cut.