• The monetary council cut the base rate today by 25bp to 5.75%, as expected
  • Forint plummeted yesterday also due to worries from future central bank policy
  • Outlook for future rate policy and monetary policy uncertain
  • CB should lower its GDP and CPI forecasts for 2013 in its new Inflation Report

The statement of the monetary council will be released and the press conference of the Governor will start at 15.00

The central bank cut the policy rate today by 25bp to 5.75%, as expected by us and the market as well. Our expectation remained unchanged despite yesterday’s hefty weakening of the forint (EUR/HUF rose from around 283 to above 288 yesterday). The government bond market and the CDS market was unaffected by yesterday’s forint weakening, while the EUR/HUF rate stopped increasing today as well, and thus, a halt in the already expected rate cutting cycle seemed premature. The EUR/HUF rate remained steady at around 288 shortly after the decision.

A key risk regarding Hungarian markets is the change of leadership in the central bank in March-June 2013. It is a question whether the central bank reacts to the government’s ideas to form a ‘strategic alliance’ with the new administration of the CB, as told at the weekend by Economic Minister György Matolcsy in an interview. In the statement of the MPC, to be released later today, the four external members’ standpoints (who were de- facto nominated by the cabinet in 2011 to the seven-member council) might be revealed. The three ‘internal’ members’ mandate will expire in March- June 2013 (including the Governor’s).

In addition to the above, it will be interesting to see the new economic forecasts of the central bank in the updated Inflation Report. We expect the real GDP growth assumption for 2013 to be cut from the 0.7% published in September (Erste: -0.4%) while also expect that the bank will slash its inflation forecast from 5.0% (Erste: 4.4%), also due to governmental plans aimed at decreasing household energy prices by 10% in 2013.

We will release a follow up to this report after the MPC’s statement is released and the governor’s press event concludes.