Wednesday, October 24, 2007

Hungary and the 1930s

How can this be happening? Here is a discussion of what to do about interest rates from Portfolio Hungary.

How can Hungary be in the middle of a major downturn, and still have base rates at 7.50%. You tell me. This is a real mess. It reminds me so much of the sorts of issue that came up in the 1930s. The strange thing is that almost noone is saying anything.

Hungary cenbank has room to cut rates in October, but should think twice

Wednesday, October 24, 2007 03:49:00 PM

Analysts' expectations about the next rate move in Hungary have changed quite a lot over the past week. While a few days ago they gave a bigger chance to a 25-basis-point rate cut on 29 October, the majority now believes the 7.50% base rate will be left on hold this month. Several of the 18 analysts polled by on Wednesday indicated that while a number of factors would allow the central bank (NBH) to continue monetary easing, another rate cut after the 25-bp reduction in September would not carry the proper message for investors under the current market situation that is weighed down by a great deal of both domestic and external uncertainties. This creates a visible split among analysts whether the Monetary Council will deliver one or two rate cuts by the end of the year and there are great differences in estimates on the end-2008 base rate, as well.

Ten out of the 18 respondents believe the MPC will not change the base rate in October, while 6 expect a 25-bp cut and 2 gave equal chance for both scenarios.

Those projecting a ‘hold' decision cited gloomy inflation outlook (especially with regard to food and oil prices) as the main reason behind their standpoint. They noted that the latest wage figures were also ambiguous and that the outcome of talks on 2008 wages was also hazy, which would demand a cautious interest rate policy.

Szabó Gergely Forián of Pioneer Fund Management and Eszter Gárgyán of Citibank emphasised that a rate cut next Monday would not be consistent with what the MPC said in the minutes of its previous policy meetings, adding that it could also lead to rate cut expectations running away. Gergely Tardos, analyst at OTP Bank believes that the NBH would risk credibility if it decided to lower rates under current market conditions. His opinion chimes with the thoughts of MKB Bank analyst Zsolt Kondrát.

In respect of inflationary risks, Gergely Suppan of Takarékbank noted that “we are in the middle of a food price shock right now". Dávid Németh of ING Bank stressed uncertainties about next year's electricity price changes.

György Barcza, senior analyst at ING Bank, said that besides the aforementioned factors it should also convince the MPC not to alter rates now that an updated inflation report will be published in a month and the MPC could cut rates in a more credible fashion only then, provided that report paints a favourable picture on the inflation path.

He said it would be a “major communications challenge" if the MPC decided to cut rates already next Monday. Based on what the market is pricing at the moment, the players are generally not convinced that a 25-bp cut would come already in October.

Orsolya Nyeste, analyst at Erste Bank believes that the MPC would most likely take into consideration a decease of risk premia over Hungarian assets next Monday, given that the picture of key inflation-driving factors has not got any clearer in the past month.

Several analysts that believe the MPC could in fact trim rates on 29 October cited the dovish majority on the rate setting council as one of the main reasons for such a move.

Márta Szegõ of UniCredit Bank believes the global investment environment will be of key importance for the Hungarian rate path in the months to come. She agrees with CIB Bank analyst, Dániel Bebesy on that lingering uncertainties were also a major obstacle in the local rate cut cycle. The analysts were divided on the end-2007 base rate, equally projecting 7.00% and 7.25%.

Differences were even bigger at end-2008 projections, with estimates ranging between 6.00% and 6.75%, depending on how big an importance each analyst attributed to inflation expectations sticking at high levels.

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