NBH cuts rates further by 50 bps

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Currencies: NBH cuts rates further by 50 bps

Hungary

The Hungarian forint was not much affected by the central bank’s rate decision and the pair remained between the 268.00 and 269.00, levels it had traded before the announcement.

The National Bank of Hungary decided again on easing this month, but this time the rate reduction was a smaller 50bp cut, well in line with market expectations. The base rate has now been lowered to 8.0%. The central bank said that the international background has not deteriorated further in recent months, while the recession keeps inflationary pressures under control.

It seems that fiscal consolidation has improved the fundamentals and the risk premia attached to Hungarian assets had decreasing, which allows for monetary easing. The currency could remain stable around the EUR/HUF 270 level, which looks to be acceptable for the central bank.

The Hungarian fixed income market reacted positively to the continued monetary easing and yields lowered substantially across the curve. The mid-part rallied the most of around 50bps during the day and now 8% yield levels are rare on the market. The future could depend mainly on the inflation and the 2010 budget, where bad news could create corrections in the coming months.

Czech Republic

The Czech koruna strengthened up to the EUR/CZK 25.35 level yesterday, which is a year-to-date low for the pair. As no domestic data were released, the main impetus came from positive global sentiment supporting risky assets. The market did not react to CNB vice-governor Mr. Singer’s warnings that high budget deficits may increaseb Czech rates and add to Czech koruna’s volatility.

Also today, the market might hardly react to CNB member Mr. Tomsik who sees danger rush increase of mandatory expenses in the expenditure side of the budget. Clearly these issues must be solved by politicians after the October elections. However, the koruna may be influenced by the sell-off on Asian markets and later by US consumer confidence. Hence, we expect a slight loss for the Czech currency.

The Czech bond market shrugged off warnings from domestic central bankers, who attacked the unsustainable path of the Czech public finance (see the Czech koruna’s part) and yields continued to drift lower. The only reason for decreasing yields is the stronger currency, which supports the view that the central bank might stay on the dovish side. At the same time, the market paid no attention to a 50 bps rate cut in Hungary.

The domestic calendar is almost today, as data about business and consumer confidence are not usually market movers. Hence again, the key for the Czech fixed income market might be again the koruna. If it should be able to extend its gains, domestic yields might move even lower. Interestingly, it seems that the Czech FinMin steps up its efforts to curb ballooning budget deficit as care-taker minister has announced it prepares by-partisan legislation, which should cut expenditures to keep the budget deficit below 5 % of GDP next year.

Poland

The Polish zloty drifted along 4.10 EUR/PLN and gained moderately during a rather dull session. Moderate optimism was driven by the positive development on the global equity markets, which remain to be the most important short-term factor to watch.

Today the retail sales figures may attract some attention to the domestic scene. Although further improvement should be caused mainly by higher fuel prices, it should more or less support our baseline scenario of interest rate stability. Nevertheless that is not going to be a surprise for most of the market participants and the zloty should stay more sensitive to the global news. We expect some profit taking after the sell off in the Asian equities and some nervousness ahead of US consumer confidence.

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