Romania: steady as we go

Hungarian central bank continues to ease

We believe the Hungarian central bank (MNB) is likely to continue its policy of ’babystep’ rate cuts and cut is key policy rate by another 10bp to 2.50% at next week’s Monetary Council meeting. This is also the consensus expectation. Overall, the continued rate cuts are justified by the Hungarian economy heading for outright deflation within the next couple of months. Hence, inflation is well below the MNB’s official 3% inflation target and as growth remains slow further monetary easing seems warranted. 

This said, it is also clear that interest rates have now come down to levels where the carry on the Hungarian forint is fairly small. This could eventually put some pressure on the forint and we are sure the MNB will take this into account in terms of further rate cuts. However, we note that given Hungary’s sizable current account surplus we have a hard time seeing further baby-step rate cuts in themselves setting any major weakening of the forint. This should keep the door open for a continuation of rate cuts in the coming 12 months and we expect the key policy rate to fall to 2% towards the end of the year. 

Romania economy is set for continued recovery

Improved external imbalances makes Romania much more resilient to external shocks. Due to improved fundamentals, with the current account deficit narrowing considerably over the past couple of years and the budget deficit shrinking due to fiscal consolidation, Romania has become much more resilient to external shocks. 

The near-term outlook is quite favourable. Growth rebounded considerably in the second half of last year led by resurgent exports and a good harvest boosting annual real GDP growth to 3.5% y/y. Given the continued economic recovery in the eurozone, we expect exports to accelerate further this year and boost GDP growth further. The recovery should continue in coming years. That said, we expect the economy to operate below its potential. Inflation should continue to be well behaved over the next two years and the current account should remain sustainable. The main risk comes mostly from political uncertainty and any further delay in important reforms.