NBH eases just gently, so forint is happy

The National Bank of Hungary cuts its base rate by 15 bps from 2.1% to 1.95%. The market consensus was a bit wider a 20bps cut, though the expectations were divided between 10bp and 20bp. Thus, the 15bps easing was a small surprise. The HUF reacted on the decision with strengthening and the EUR/HUF pair moved close to 301.

The MPC confirmed the 3% inflation target (next decision will be in three years), but it introduced again the +/‐1%‐ point tolerance band around the inflation target. This change gives the Council a bigger manoeuvring room. The inflation forecast was revised downside both for 2015 and 2016. The former from 0.9% Y/Y to 0% Y/Y, while the latter from 2.9% Y/Y to 2.6% Y/Y. The GDP outlook was increased from 2.3% Y/Y to 3.2% Y/Y in 2015 and from 2.1% Y/Y to 2.5% Y/Y in 2016. The inflation forecast of the NBH is nearly in line with our own expectations.

The main message of the statement is the inflationary pressure may remain moderate in the following months and the risk of second round effect of low oil price has increased, so it allows loose monetary conditions for an extended period.

Although the international sentiment is favourable, the risk premium of Hungary has decreased and the HUF strengthened against EUR, the council wants to continue with a cautious monetary policy because of the uncertain international market environment.

The council sees upside and downside risks as well. On the upside is an increasing required risk premium from Hungary and a possible HUF weakening because of the geopolitical risks, which would call for tighter monetary conditions, while on the downside is the second round effect of low oil price, the inflation expectations might move away from the target, resulting in a significantly lower path for nominal wage growth. It could lead to looser monetary policy. The statement was finished with the following sentence: “Cautious easing of monetary conditions may continue as long as it supports the achievement of the medium‐term inflation target.”

It confirms our view that mainly the international environment may lead the next months’ decisions, and the council may move with 10bp steps in the following months. We see relatively high chance for cuts in April and May, so the base rate might be moderated to 1.75% at the end of May. We see strong resistance levels around 300 as there are many option barrier levels around these exchange rates. If the EUR/HUF breaks below the 300 (psycho) barrier, the bottom of the strengthening might be around 297/298.