Tim Gosling in Prague -
The Hungarian central bank surprised just about everyone on August 28 when it eased monetary policy by cutting its benchmark rate by 25 basis points (bps) to 6.75%. With Hungary beset by inflation and currency risk, and struggling to secure a bailout from the International Monetary Fund (IMF), the central bank's move is unlikely to have been a unanimous decision.
With Hungarian growth dwindling for months, the pressure has been on the Magyar Nemzeti Bank (MNB) to offer stimulus by easing the highest benchmark rates in Central Europe at 7%. However, the central bank and Governor Andras Simor - the most notable internal enemy of the Fidesz government - has remained hawkish, pointing to numerous risks, including high inflation, the vulnerability of the forint and high foreign currency consumer debt.
The MNB chief has been busy even insisting that a deal on a bailout from the IMF would not necessarily tip the scales, and a further spike in July's inflation numbers to 5.8% did little to suggest a cut was on the cards for this meeting. However, with Hungary having tipped back into recession in the second quarter of the year, the balance of power on the Monetary Policy Council was always in for a tough test.
While the voting at the meeting is not yet available, it appears likely then that the four government-appointed members of the MPC finally joined to push the easing past the three MNB members. The hawkish tone of Simor's statement accompanying the announcement, and reference to a "close call" appears to back that up, suggest analysts at Erste.
Simor's statement warned, "higher-than-expected global oil prices and the unfolding food price shock represent upside risks to inflation. The CPI is expected to remain significantly above the medium-term target into 2013, as a result of a series of increases in indirect taxes affecting consumer prices, and... meeting the inflation target is expected to be delayed."
The surprise of the cut has analysts split on future action, with the added uncertainty of what will happen in the Eurozone and progress in the IMF talks obscuring the September decision further. Market reaction is being closely watched, although most feel that investors holding Hungarian assets are already taking a punt on a loan programme being agreed. Portfolio.hu reported that the forint spiked from 278.80 to 281.90 versus the euro on impact.
That said, Lars Christenen at Danske Bank suggests the currency movement provides a warning signal. "We are somewhat surprised by the relatively strong weakening of the forint," he writes, "which could warrant some cautiousness in terms of the near-term outlook for the forint as expectations of monetary easing are built into market expectations."
William Jackson at Capital Economics suggests that the 25 bps cut may represent a test of how eased monetary policy will fly with the markets, ahead of a bid to offer a bigger economic stimulus. "Looking ahead, we suspect that with today's vote, the external MPC members are testing the water," he writes. "If there is no large sell-off in the local markets, they may well push for a further 25 [basis point] cut at the next MPC meeting in September. Admittedly, the forint did fall by 1% upon the announcement of today's decision, but it has since pared some of those losses and in any case still looks fairly strong."
However, that appears to ignore the damage that the cut does to the credibility of Andras and the MNB, with the accompanying statement clearly reiterating his regularly expressed view that the risks to Hungary have not receded. The ongoing fight between the government and the MNB has clearly not receded, and the central bank is a key issue in the bailout talks. The markets, which above all are betting that an IMF deal will tame Budapest's policymaking, will also be wary of a central bank struggling to match monetary policy to risks.
Erste reiterates that it does not expect further cuts without an IMF deal. "We think that rate reductions are unlikely to continue at the next meeting in September, as the market sentiment may change in the upcoming weeks. Our forecast for the year end base rate has remained unchanged at 6.25%."
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