Hungary: What will Cabinet do with central bank and budget?

• Less probable that central bank will deliver ‘extreme’ steps in March However, our forecast entails significant risks due to unpredictable policy
• Some further weakening of HUF probable in coming months
• Yields may increase later this year, while HUF might appreciate in 2H13

Governor Simor’s mandate will expire on March 3 this year. We think that the chance of an ‘extreme’ change of monetary policy is lower than the possibility of only minor changes after the takeover of the position by a new leader. However, it is also highly unlikely that everything will remain unchanged: corporate bond purchases, or some sort of lending by the central bank, may be carried out to a limited extent.

We think that it is important to mention, however, that due to the high uncertainty about what exact methods the new leadership might choose, we perceive significant risks to our forecasts. We present the scenario that is, in our view, most likely. However, significant weakening cannot be ruled out on Hungarian markets if the central bank chooses more ‘extreme’ methods of boosting the economy. If it turns out early that there is nothing too extreme to worry about with regard to the central bank, then forint appreciation might also be seen in the upcoming months, but we think that this is only a minor risk.

As we think that at least part of the risk is already priced in, the weakening of the currency from current levels in the upcoming weeks or months will not be ‘catastrophic’, although it may still be notable. After the successor is nominated and takes office, however, it seems to us unlikely that there will be any immediate or strong appreciation of the forint.

As the general elections of spring next year slowly approach, the government may later focus more on deficit-increasing measures, or steps that are similar to the recently-decided decrease of energy prices for households (further cutting the prices of these has already been mentioned as a possibility by the Cabinet). In addition, the current fears of unorthodox central bank policy may fade somewhat while, in 2H13, neither do we see much room to continue slashing the base rate further. Due to this, we think that yields may start to increase somewhat in 2H13, while in the second half of this year we assume some slight appreciation of the HUF.