Managing the transition from rate hikes to rate cuts without market shocks is usually a tricky task for central banks. The Central Bank of Hungary (MNB) appears to have done this – the forint is stable and even strengthening as of Wednesday – in two rounds: in April it cut a less important rate, the upper end of the interest rate corridor, and on Tuesday it has now also cut the policy rate. Expectations were well managed, as markets were not surprised by their moves, and investors were not alarmed by the prospect of a further decline in the forint yield later in the year, reports Világgazdaság.
While the MNB is the first in the Central European region to ease – as it was two years ago when it started raising interest rates – analysts list several factors that suggest the Central Bank of Hungary is letting up on the reins at the right time.
Hungarian inflation has peaked late in the region and is still the highest in the region, but European economies that have slowed or slipped into recession need central bank support overall. In this respect, several eastern EU Member States could be ahead of the game, simply because they do not have the euro as their currency, as the European Central Bank has not yet reached the end of the necessary interest rate tightening, even though inflation in the West is lower than in our region.
The task of raising interest rates has already been done by the Central European central banks, inflation is expected to recede rapidly throughout the year, and the MNB is in a different position from other regional central banks in that it had to push interest rates to the highest levels in Budapest during last year’s international shocks, so there is room to retreat.
A positive development for the region as a whole is that energy prices in Europe have fallen significantly this year, reversing the deterioration in external trade balances and reducing the risk of a sharp rebound. Inflation has also started to fall as a result. Last year’s high base is also helping this process, and this latter effect may come into play more strongly towards the end of the year in Hungary, where inflation peaked later last year than in other countries in the region. That is why it looks particularly high now – but markets are looking at the outlook, not this.
It is in this more favorable environment that the MNB has started to cut interest rates, and market participants do not see any particular risk in this.
The market has agreed to monetary policy normalization in Hungary,
ING’s analysis center said in a note on foreign exchange markets on Wednesday. The forint’s exchange rate level also allows the MNB to continue in this direction, added Frantisek Taborsky, the bank’s regional FX and fixed income strategist. Interest rates fall, yet the real interest rate turns positive
A similar assessment was made by Hungarian MBH Bank’s note, which said the benchmark interest rate – the MNB’s overnight deposit rate – which was cut from 18 to 17 percent on Tuesday, could fall to the central bank’s base rate of 13 percent by the autumn.
Despite the expected continuation of the policy rate cut, we do not expect a significant weakening in the forint exchange rate, as the marked improvement in the external balance and the current account balance could offset the impact of the rate cuts, supporting the forint exchange rate,”
András Horváth, senior analyst, wrote. The rate cut cycle has already been priced in by futures markets, while “based on current inflation forecasts, the real interest rate could be positive by the end of the year, with inflation expected to fall sharply,” and risk perceptions of the domestic economy are improving, leading to a narrowing of the risk premium expected on the forint.
via Világgazdaság, Featured image: Facebook MNB