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Central European Weekly

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NBH lowers its base rate from 11.50 % to 11.0 %

Mon, Dec 1 2008, 11:47 GMT
by KBC Market Research Desk

KBC Bank

Czech Republic

The fixed-income market sees only gradual improvement

Hungary

NBH lowers its base rate from 11.50 % to 11.0 %

Poland

NBP cuts by 25 bps, while the policy statement was outright dovish

Slovakia

S&P ups Slovakia’s rating

The week ahead

Hungary’s foreign trade balance is to only important data on the agenda

Overview

NBH and NBP surprise with an earlier than expected cuts

The National Bank of Hungary and its Polish counterpart undoubtedly surprised us and partly also the markets last week. The NBP cut its base rate by 25 bps. The NBH even cut its rate by as many as 50 basis points. The motivation of both banks to cut their official rates was the same: the rapidly improving inflation outlook for both countries in the light of deteriorating economies.

The decision of the NBP to cut rates was justifiable and desirable, because, after all, the coming of a rate cut in this country was simply a matter of time. However, we will have to wait for some time to see whether the move from the NBH was also provident. The Hungarian forex and fixed income markets accepted the central bank’s rate cut positively, but we cannot disregard the fact that the rate cut came quite soon after the central bank had raised rates by 300 basis points in October, to prevent further sales of the forint. The rate cut by the NBH partly relies on the assumption that, if risk version again increases, the forint will no longer come under pressure, while the Hungarian inflation will go down, hand in hand with the decline of the economy. At the moment, the cut seems to be a good decision, but we will see whether this will also hold true in the weeks and months to come, when the downswing in the US and the Eurozone economies will be even more evident.

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Published on  Mon, Dec 1 2008, 11:47 GMT