NBH cuts as expected to new lows, but more to come

Yesterday, the National Bank of Hungary delivered an expected rate cut of its base rate, which was reduced by 15bps from 1.95% to 1.8%. The Monetary Council highlighted in the statement that the inflation is expected to approach 3% inflation target towards the end of the forecasted period. The council is optimistic about the economic growth outlook, which is supported by both domestically and externally. Regarding the market environment they emphasized again that cautious monetary policy is required as the geopolitical risks are increasing, mixed figures were published from US economy, but the ECB’s QE policy is supportive. The statement was finished with the same sentence as last month: ‘Cautious easing of the policy rate may continue as long as it supports the achievement of the medium-term inflation target.’

Although CPI was -0.6% Y/Y in March it started to accelerate in the last two months and likely to return into the positive territory during the summer. The main driver of the increase is the rising fuel and unprocessed food prices, but the continuously strong domestic demand started to push up the prices of market services and tradable goods as well, while the unprocessed food price may spillover into the processed one in the next 6 months. Thus, we expect that the inflation may accelerate around 2.5% at the end of the year, which is already in the tolerance range of NBH’s 3% +/-1ppt inflation target.

So, we maintain our view that from fundamentally perspective there is no need for further rate cut, but it looks like that the NBH moves in line with the market will, and until the international sentiment remains supportive the rate cut cycle may be continued. It is also quite clear that the NBH is relatively sensitive on the strong HUF and although it has no exchange rate target, NBH would like to see EURHUF rather in the range of 305 and 310.

It looks like now that the NBH may continue the gradual rate cut cycle, which was started after 7 months pause in March, in the coming months, so with the current speed NBH may reach the polish base rate level at the end of June. In case there is no external geopolitical shocks (like Greece or Ukraine insolvency problems) and the Fed starts the rate hike cycle in July, the 1.5% base rate might be the end of the Hungarian rate cut cycle. As it is already priced in the market we don’t expect any substantial market reaction on such a scenario.

The HUF didn’t react on the decision and it was traded around 297 and 298 against the euro. We see strong resistance level at 296, 295 and 292, while on the weak side 302 and 305 may stop HUF movement. In that range the NBH may cut its base rate by 15bp again in May from 1.8% to 1.65%.