MNI INTERVIEW: NBH Could Slow Rate Cuts To 75-50bp- ExGovernor

The Hungarian National Bank will slow the pace of rate cuts from 100 basis points a meeting to 75 or even 50 when it meets next week, as it fends off concerns over government meddling, former NBH governor Andras Simor told MNI.

“In theory, with inflation at around 3.5% and the base rate at 9% it should be possible to cut by hundreds of basis points. But since the Hungarian risk premium is relatively high, then international investors would sell Hungarian bonds and that would put downward pressure on the forint, which could in turn raise inflation,” Simor said in an interview. (See MNI POLICY: Hungary CenBank Set To Cut 100BP As Growth Falters)

The NHB accused the government of undermining its independence after it said earlier this month that it wants to extend supervisory board oversight of the central bank, with the forint falling to around 400 against the euro at the start of last week.

“The more they fight, the higher the risk premium on Hungarian assets becomes, the less flexibility the central bank has to cut rates. Hence, when the forint went to 400 the central bank had to make some noise that they will cut less,” said Simor, governor from 2007-13.

MORE CAUTIOUS IN MARCH

In February, the NHB had been able to accelerate its cuts to 100 basis points, but the situation has now changed.

“They will be more cautious [on March 26]. I would not expect more than 75 basis points, although it’s not inconceivable they could do less than that. The following month, unless circumstances change, there is a 50-50 chance that it’s going to be 75 or 50bps.”

The announcement on March 12 that the European Parliament intends to sue the European Commission over its decision to unlock billions of euros of funding for Hungary withheld in response to rule-of-law concerns has only added to uncertainty by emphasising the country’s isolation in the EU, Simor said.

The government, however, may not be too concerned by the resulting forint weakness if it helps exporters, he noted.

“Nor would it be opposed to having slightly higher inflation as long as growth is higher than it has been. I think there are downside risks to the growth outlook. Certainly the 4% growth seen by the government and the central bank looks optimistic to me. I would put it at around 2%, largely because export markets are bad and domestic demand is not picking up despite real wage gains,” he said.

“If you look at the real effective exchange rate, based on unit labour costs, the forint has not been as strong as it is now for a long time. So unless Hungarian exporters have been able to improve their competitiveness over the last two years significantly and they are now suffering, that would warrant a significantly weaker forint - maybe 435.”

VERY CONCERNED OVER INDEPENDENCE

Simor is “very concerned” about the Hungarian National Bank’s independence - but he doubted whether the latest move to increase oversight of its non-monetary policy operations was by itself a cause of concern.

“The central bank is blowing up the issue. And there is a very good reason why they are worried, because while governments are not supposed to control central bank activity, they should audit what they spend. The NBH has increased its operational budget two-and-a-half times in 10 years, net of inflation. They are throwing money out of the window.”

The fact that the new law has not yet been timetabled for a final decision, with both sides taking part in discussions, suggests either that politicians are conscious of the need to smooth market reaction, or that a deal is being done behind the scenes, said Simor, who worked at the European Bank for Reconstruction and Development between 2016 and 2019.

“But that must be a broader agreement than just the expenditure. This was always about more than just cost control: it was really because the central bank was openly more and more critical of government policy, therefore the government wanted to put a bit of pressure on the central bank.”