Forint at current levels won't stop NBH's easing cycle

While regional sentiment has deteriorated slightly because of uncertainty ahead of the upcoming presidential elections in Poland, the zloty and partly the forint have appeared under modest downward pressure. At the same time, however, weaker US eco figures postponed the expectations of the first rate hike closer to the end of the year, which leaves more room and time for NBH’s monetary easing and this is something to watch for the forint.

We think that NBH is happy with the last weeks weakening of the forint and the EUR/HUF pair between 305 and 310 won’t stop NBH’s easing cycle, although we cannot exclude that speed might slow from 15bp to 10bp, but the consensus view is 15bp cut to 1.65%. Recall that the NBH will hold rate setting meeting on 26th May 26th or next Tuesday. Last time the Council moderated its base rate from 1.95% to 1.8% and the statement highlighted that the inflation is expected to approach 3% inflation target towards the end of the forecasted period. Meanwhile, the consumer price index jumped from -0.6% Y/Y in March to -0.3% Y/Y in April and it is likely to return into positive territory already in May and above 2% Y/Y at the end of the year, so from fundamental perspective there is no strong need for further rate cuts. Moreover, the council remains optimistic about the economic growth outlook, which is supported by both domestically and externally. On the other hand, the NBH keeps watching market environment. It emphasized again that cautious monetary policy is required as the geopolitical risks are increasing, while the ECB’s QE policy is supportive. Importantly, NBH’s 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”. Hence, in our view ii is likely that the NBH base rate will be cut to 1.5% in 2015, which might be the end of the rate cut cycle.