Hungarian central bank expected to fine tune interest rate policy at government's behest

By bne IntelliNews November 25, 2014

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The monetary policy council of Hungary's Magyar Nemzeti Bank is expected to keep interest rates on hold for a fifth month when it meets on November 25 and, despite recent calls for a return to easing, this stance looks set to last the rest of the year. However, bets are rising that this policy will be turned on its head in early 2015.

With the economy facing deflation, the slowdown in the Eurozone threatening growth, and the European Central Bank increasingly dovish, calls for the MNB to resume monetary easing - which it abandoned in July after a 24-month run with rates at 2.1% - have risen again in recent months. However, the central bank has been resolute in rejecting any such talk, and most analysts are convinced there will be no change at this meeting.

"The market believes that disinflationary forces may allow for further policy easing in Hungary," writes Societe Generale. "We believe that the National Bank of Hungary will want to maintain policy rates at the current level."

The stance of the MNB has been backed up by stronger than expected third quarter growth reported earlier this month. However, there is also a suspicion that the MNB, now filled with appointees of the ruling Fidesz party, may be working on an agenda driven by the interests of the government rather than the economy.

Sleight of hand

Analysts suggest that the central bank's firm stance on further monetary easing is a bid to perform a sleight of hand to drop state debt as the year ends. The same theory suggests the MNB will return to easing early in the new year, in time for the start of the forex loans conversion scheme.

"We do not expect the [MNB] ... to cut rates before the end of this year at least," write analysts at KBC. "Apart from the ambiguous macroeconomic signals and central bankers' rhetoric, there is one seasonal factor that may counteract such a move. It is related to the annual reporting of the amount of public debt, which is largely denominated in foreign currencies."

Hungary's debt-to-GDP ratio stands at around 81%, according to To meet EU regulations, that needs to be lowered to under 79.4% of GDP, the level at which it stood at the end of 2013. Raising the value of the forint would lower the level of external debt to help Budapest hit that target. A drop for the currency would put that effort at risk, meaning rate cuts from the MNB are off the table for now.

The effort to keep the forint's head above water for the meantime is also getting a helping hand from the ECB. President Draghi made yet more dovish comments on November 21, which helped push the forint and other regional currencies higher. The forint has firmed 3.5% versus the euro over the last two months.

All hands to the pump

However, Budapest may need all the help it can get next year to reapply the pressure on the currency in time for the forthcoming mass conversion of forex debt by the banks, which is likely around April. The populist appeal of the government scheme would be entirely lost if at the time the forint were above the announced swap rate of HUF309 to the euro.

Economy Minister Mihaly Varga has made it clear that the government will press the point, Portfolio points out. "I assume by the way that when the actual conversion will take place then [the exchange rate to be used for the conversion] will be a more favourable one, so it is likely that next year the forint will no longer be at this level," the minister said recently.

With the ECB looking set for an extended period of low rates, the external conditions propping up the forint are unlikely to fade quickly. That will leave the MNB as the main force to drop the value of the currency by moving towards the ECB's rates. The pressure will therefore be on for a renewed easing cycle, and the central bank is not one to resist the government.

Whether it will be able to complete the task is a question. "HUF has continued to trade resiliently over the past month, hovering around our forecast 0-3m level of 310," point out analysts at Citigroup. "Additional EUR weakness on the back of the ECB QE suggest modest upgrades of the 6-12m and long-term forecasts to 315 and 320, respectively."


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