MNB left interest rates unchanged

National Bank of Hungary left the reference rate unchanged at 1.35% in line with the market expectation. The statement highlighted that the economy continues to grow, but the output gap is still negative and narrows only gradually. In case of inflation the council sees only very moderate inflationary pressure, due to the imported low inflation, the moderation of raw materials and energy prices and the unused capacities. The accelerating domestic demand may push the core inflation up gradually in the following months. They expect that the inflation may return to around the inflation target of 3% Y/Y only at the end of the forecasted period, which means in the second half of 2017.

Although the international sentiment was volatile, the Hungarian market was quite stable in the last months, which means that there was no substantial increase of bond yield and CDS spreads thanks to the persistently high external financing capacity, the increase of domestic financing. So Hungary’s vulnerability improved further, but a cautious approach to monetary policy is warranted due to uncertainty in the global financial environment.

The statement was finished with the following sentence: “the current level of the base rate and maintaining loose monetary conditions for an extended period are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy”.

We have broadly the same view as the council although the recent drop of oil price definitely means a downward pressure on headline inflation. But it is clear the Council won’t change the base rate in the near future. We see bigger chance for a rate hike for the next move, but we don’t expect it before 3Q16.

As for the EURHUF, it didn’t show any reaction but it has slightly weakened late afternoon yesterday and early morning today, so it is seen around 315, which is an important resistance level, while the next one is around 318. The international sentiment is the main driver of HUF movements, but we still see the 310 and 315 as a main trading range of EURHUF.