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Hungary: Cautious MNB keeps rates unchanged
Tue, Nov 27 2007, 11:40 GMT
by Lars Christensen
At its monetary council meeting today, the Hungarian central bank (MNB) has decided to keep its leading interest rate unchanged at 7.50% in line with our expectations. Over the last couple of days it seems as if the consensus expectation changed from anticipation of a cut to an expectation of unchanged rates.
The decision to maintain rates is not overly surprising to us given the fact that inflation recently has begun to rise upwards again and furthermore, the continued deterioration of global credit conditions has also given reason for a cautious stance in monetary policy as the risk of a further weakening of the Hungarian forint has increased.
The MNB also adjusted up its inflation forecast for 2008 and 2009 to 5.0% (4.5%) and 3.0% (2.4%), respectively. At the same time, the MNB adjusted down its GDP growth forecast for 2.4% (2.7%) and 3.2% (3.3%) in 2008 and 2009, respectively. This was pretty much as expected, but it is also clear that the Hungarian economy is heading for a stagflationary scenario. This could give rise to debate as to whether the MNB should fight inflation or stimulate growth. Today the MNB demonstrated that it takes its mandate that is to secure price stability seriously. That is positive.
Looking ahead, the risk of further turmoil in the global credit markets should not be neglected and it is therefore likely that the MNB will move very, very carefully and we do not expect it to cut rates aggressively. Rather it might be that the easing cycle will be kept on hold for some time to come. Hence, we find it unlikely that the MNB will cut rates in the next three to six months unless the forint rebounds significantly.
Todays rate decision should be fairly neutral for the Hungarian FX and fixed income markets. However, we in general see a risk of spread widening vis a vis Euroland for most CEE fixed income markets.
Published on Tue, Nov 27 2007, 11:42 GMT
Danske Bank
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