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JP Morgan View: See 100bp of Cuts in March Alongside New Forecasts

HUNGARY
  • JP Morgan estimate the increase in RRR to 10% from 5% will drain some HUF1.5tn worth of liquidity. But even with another HUF1.5tn being drained, excess liquidity will likely remain somewhere around HUF7tn. In terms of distribution, most excess liquidity sits at the one-day depo facility (paying 18%), whereas the other HUF2.1tn is in 2-month deposits (17.95%).
  • The combination of high rates and huge amounts of excess liquidity in the banking has placed the NBH’s P&L under pressure. One advantage of increasing RRR, from a P&L perspective, is that it pays the base rate, which is currently 13% and significantly lower than the marginal rate (18%). By increasing the share of lower-paid reserves the NBH can save, all else equal, some HUF56b or nearly 0.1% of GDP. JP Morgan consider the weight of sterilization costs on the P&L to be an increasing concern to the NBH, and an extra incentive to ease policy this year (and/or change conditions on RRR).
  • JP Morgan expect a 100bp cut to the 1-day depo in March, expecting inflation (both headline and core) to peak in February/March. Given that March is accompanied by a new forecast and new inflation report, JP Morgan are inclined to think that’s when the first move will occur.
  • They forecast that core CPI will fall to 12% by the end of this year, and hence in terms of magnitude, they cannot envision the cycle going much beyond 13%, which is the value of the base rate.
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