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MNI POLICY: Hungary Central Bank Likely To Cut By 75bp

(MNI) LONDON

The Hungarian National Bank is likely to cut key interest rates by 75 basis points to 8.25% when it meets on Tuesday, MNI understands, even though inflation and other data, such as the current account balance, are either in line with or better than expectations and would support a quicker pace.

Monetary Policy Council members voted seven-two to cut the base rate by 100bp in February, a "temporary" move it said was made possible by the country's improved risk perception.

However recent rows with the Hungarian government, coupled with a European Parliament challenge to the European Commission’s decision to release stalled EU funds to Hungary, has impacted market sentiment, making a reduction in pace to a 75bp cut the more probable outcome this month.

Tomorrow’s meeting may also see a discussion of the optimal pace for rate cuts going forward, with some participants emphasising real economic and inflation data, while others place greater weight on market developments. But a 25bp difference in the pace of cuts will not be seen as macroeconomically significant.

HALF-POINT LESS LIKELY

A 50bp cut may be discussed, but is not very likely this month, with both the macro environment and market sentiment seen as very different from November, the last time a half-point base rate reduction was considered. (see MNI INTERVIEW: NBH Could Slow Rate Cuts To 75-50bp- ExGovernor).

All MPC members want to achieve the lowest level of interest rates that will ensure reaching the 3% inflation rate sustainably, while maintaining financial market stability. To that end, the government's announcement last week that it will phase out the interest rate cap on lending and bank deposits from April 1 will be regarded as helpful, since it increases the strength of monetary policy transmission via the rates channel. However any new measures could mean less room for future central bank manoeuvre.

On Monday the government said that a planned law change widening Supervisory Board oversight of the central bank would be delayed until the autumn.

However the move - which the NHB has called an attack on its independence - "remains on the agenda," Economy Minister Marton Nagy told journalists in Budapest, with talks between the bank, the Board and the Finance Ministry ongoing.

The forint hit 400 against the euro earlier this month before recovering somewhat, raising fears of further vulnerability. While Bank officials do not target any particular level for the exchange rate they will be looking to see what impact currency dynamics have on financial markets, the attitudes of households, and on demand for foreign goods and therefore on inflation.

MNI London Bureau | +44 20 3983 7894 | luke.heighton@marketnews.com
MNI London Bureau | +44 20 3983 7894 | luke.heighton@marketnews.com

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