National Bank Of Hungary Review: The Door Opens To Change

(MENAFN- ING)

6.25%	Key interest rate No change
As expected

ING's policy view: A rate cut in Hungary could be closer than we thought

The National Bank of Hungary held the base rate at 6.25% today, matching our forecast. Although we were confident in our prediction this time, we have many questions going into the June rate-setting meeting. A month ago, we were certain that the Hungarian base rate would remain unchanged until the end of the year. However, having listened to the latest messages from Governor Varga, we now envisage an easing of monetary conditions in the near future.

A persistent easing of risks, stabilisation of the forint, and yields at a favourable level could lead to a 25bp interest rate cut in June, followed by one or two further cuts. This move has just become more likely, as the central bank has updated its forward guidance to include a reference to monitoring“the persistence of the decrease in risk premia”. It is anyone's guess what persistence means in this context, but the direction of travel is clear. The rate decision in May saw dissenting votes, with the majority favouring an on-hold decision, and some voters favouring a rate cut. The abridged minutes of the meeting will be published at 2pm. CET on 10 June.

Given that the NBH cut the forint rate to 5.25% from 5.75% in its EUR liquidity-providing FX swap auction, and the Government Debt Management Agency (ÁKK) cut the interest rates on its various retail products by 50bp from late May, it would be hard to argue that the writing wasn't on the wall.

Looking ahead, the key local dates are the April PPI data release on 29 May and the May CPI data release on 9 June. Globally, the European Central Bank's rate decision on 11 June and the Federal Reserve's rate decision on 17 June are also crucial. All of these will lead to the NBH's new staff projections (GDP and CPI forecasts) being revealed on the day of the next NBH rate decision (23 June). This will pave the way for a dovish decision, if the forint and yields continue to show low risk premia.

ING's market views

The neutral tone at the start of the NBH press conference gave way to a more dovish conclusion during the Q&A, following revelations that a rate cut had been discussed at today's meeting and that there were dissenting votes. This is very unusual for the NBH. Although a rate cut for June was already fully priced in before today's meeting, there was a risk the NBH could push back against these expectations. Today's meeting rather confirmed the market pricing for June and gives the green light for pricing more rate cuts over the course of the year. After the meeting, the market prices the terminal rate somewhere around 5.25% if we assume a return of the BUBOR premium to positive numbers, implying 100bp of easing from the current 6.25%.

Although Hungary remains a clear outlier in today's emerging markets, where rate hikes are priced across many countries, the market is still likely to continue pricing in further rate cuts, unless the forint comes under pressure or inflation surprises to the upside. Alongside the NBH story, developments around EU funds remain supportive, with the potential for further progress as soon as Thursday. As a result, it is difficult to see any near-term disruption, and both rates/bonds and FX could see further gains.

EUR/HUF has stabilised somewhat in recent weeks and NBH rate cuts, together with heavy long positioning, are a drag on further forint appreciation. However, this should not derail the trend, with 350 EUR/HUF for mid-year in our forecast. Rates should see further country premium compression and spread narrowing versus core and CEE markets but at a slower pace from this point.

The NBH rate-cut story now appears more compelling than the EU funds and euro adoption narrative that markets have been driving since the April elections. As a result, the front end of the curve, where valuations look more attractive, stands out, and we expect some steepening as we look further ahead.

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