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Hungary: Cautious MNB cuts again

Mon, Oct 19 2009, 18:38 GMT
by Lars Christensen

Danske Bank A/S

Today the Hungarian central bank (MNB) cut its key policy rate by another 50bp – in line
with our and consensus expectations. Furthermore, the MNB kept the door open for
further monetary easing. 
The decision to continue the monetary easing cycle has to be seen in light of the fact that
Hungarian inflation has continued to surprise on the downside in recent months and the
economy still remains very weak. Furthermore, the decision was clearly supported by the
fact that global appetite for Hungarian assets remains relatively strong and the forint has
remained pretty stable recently.
In the statement following the decision and the MNB’s press conference there was
something for both the doves and the hawks. In fact one could say that the statement and
press conference were “designed” to shock the markets as little as possible.

On the one hand the MNB signalled that more rate cuts could be on the cards if inflation
remains under control and the global environment benign. This is a pretty clear indication
that the MNB will cut once again at next month’s Monetary Council meeting, but only if
we don’t get an upside surprise on inflation and only if we do not see another other spike
in global risk aversion. Also on the dovish side it should be noted that some Monetary
Council members wanted a bigger rate cut than 50bp.

On the other hand, the MNB governor Simor stressed that there is “a limit to rate cuts”
and the decision to cut rates will be “decided on a month-by-month basis”. This is clearly
a change in the MNB rhetoric compared to earlier in the easing cycle. Hence, it is pretty
clear that the majority of Monetary Council members feels that further monetary easing
should be approached with a lot of caution.

Overall, today’s rate cut and the communication from the MNB is an indication that the
door is still open for further monetary easing – unlike what we until now had forecast.
However, it is also clear that the MNB does not want to communicate to the markets that
it will cut rates aggressively going forward.

The market is still pretty aggressively priced for further monetary easing, and even
though we now see potential for a further “trimming” of Hungarian interest rates we still
think the market is too aggressively priced for rate cuts. We therefore still see value in
being positioned for higher Hungarian market rates and yields going forward.

Finally, the MNB deserves some credit for the careful and well-balanced communication
regarding the outlook for monetary policy in Hungary.

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Published on  Mon, Oct 19 2009, 18:42 GMT