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Hungary Joins Rate Cutting Bandwagon


Analysts at forex Australia are pretty sure that the National Bank of Hungary (NBH) will do more rate cuts for the 14th consecutive month. The next rate cut will bring the rate to 3.6% . The target inflation is 3% and the estimated inflation decelerated to 1.3% Y/Y in August. Core inflation is about equal to the target and capable of supporting cuts. Government mandated cuts in electricity and utility prices accounted for an additional 1.5 percentage point drop in inflation. Core inflation has declined by 2.1 percentage points due to weak demand conditions and low wages. This clearly supported a drop in the base rate that so far has been reduced by 320 bps.

Barclays economists consider this measure as a better gauge of underlying inflation as it takes into account mandated energy tariff cuts. The HUF firmed up and does not present evidence of loosening with growths well below capacity.

Hungarian Forint Forecast

Goldman Sachs rolled over its forecast for EUR/HUF to 300 and 305 in 3 and 6 months, respectively, from prior forecast of 295 and 300. The broker’s 12-month forecast is constant at 310. Consequently, USD/HUF have been estimated at 217, 218 and 221 in the 3, 6, and 12-month forecast. The current valuation of Goldman Sachs for EUR/HUF is 297.0. This translates a marginal 1.0% undervaluation versus the EUR. USD/HUF has a current valuation of 249.0.

Forex Australia analysts believe that the Hungarian Forint is sensitive to demand for Emerging Markets assets as well as the outlook for global rates. The existing positive real rates along with current account surplus have mitigated the FX sell off lately. This will aid more support for the Forint. The structural drivers of the Forint remain unchanged and the currency will be weighed down by the FX deleveraging in the medium term. Previously the HUF was under some pressure, along with other CEE currencies.

However, the erosion of demand for Hungarian assets pose as risks to the currency due to narrowing rate differential, declined further by more rate cuts and elevating US rates. The risk of Forint seems to be one of the policy agenda of the government. The government and the NBH are still unwilling to allow the Forint to depreciate yet, before reducing households’ and the government’s FX sensitivity, and not before the next elections in early 2014. That being said, the NBH’s tolerance for FX depreciation has increased already.

Monetary Policy

The NBH has cut rates by 320 bps since August 2012 and forex Australia brokers expect that more easing will proceed provided that market conditions will permit. It also plans to ease financial conditions through other means, such as the ‘funding for lending’ plan, recently expanded and extended until end of 2014.

Fiscal Policy

The Fidesz administration has been pursuing ambitious fiscal goals to reduce debt. The deficit was cut to 1.9% of GDP last year and should stay below 3% in 2013 to 2014. However, sustainable debt reduction will take time given low growth. There is some risk of a deficit target overrun given the forthcoming elections.

Key Risks

Forex Australia analysts think that financial market instability could trigger Hungary to pause sooner. Forex brokers retain their expectation that the base rate will be cut to about 3.3%, when the NBH might find it necessary to pause depending on global financial market conditions. The government has started its election campaign. This increases the risk of more populist policies, including more government spending, as well as a tougher stance in negotiations with commercial banks on currency conversion of the FX debts. Political news flow may increase Forint volatility in the run-up to April 2014 elections.


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