MNI NBH Preview - March 2024: Instability Justifies Caution

Executive Summary:

• The National Bank of Hungary are widely expected to moderate the pace of rate cuts from 100bps to at least 75bps due to instability in Hungarian markets over the past month which justify a more cautious approach to monetary policy easing.
• Specifically, the proposed amendments to the Central Bank Act and the emerging possibility of the re-blocking of EU funds have kept EUR/HUF pinned to cycle highs – a significant cause of concern for central bank officials.
• Among the sell-side views we have collated in this document, some flag risks of a cut even smaller than 75bps. Just one foresees another 100bp cut at this juncture.

See the full MNI Preview, with a summary of sell-side analyst views, here:

MNINBHPrevMar24.pdf

Concerns over proposed amendments to central bank law and its implications on central bank independence led to a substantial rally in EUR/HUF earlier this month, resulting in the cross reaching a one-year high of 399.75. The Ministry of Finance initiated the amendment of the Hungarian Central Bank Act in order to - among other things - amend the scope of duties of the NBH Board of Directors and extend the powers of the Supervisory Board. The NBH stated several times that the proposed amendments threatened its independence, highlighting the growing friction between the NBH and the government.

Given the central bank has often displayed sensitivity to adverse HUF developments (it opted for a below-consensus 75bp rate cut in January owing to the ~2.5% rally in EUR/HUF in the weeks leading up to that decision), the proximity of EUR/HUF to the psychological 400.00 handle is likely to take a 100bp rate cut option off the table. Indeed, speaking in an interview to MNI, former NBH Governor Andras Simor said the central bank will slow the pace of rate cuts from 100bps to 75bps or even 50bps when it meets, seeing a 50-50 chance of either a 50bp or 75bp move the following month.