A forint-negative Tuesday, due to monetary and fiscal policy announcements

HUNGARY - In Brief 26 Apr 2016 by Istvan Racz

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The current excessive strength of the currency - the forint trying to break out of the EURHUF 310-315 range in the southbound direction quite often, while growth is spectacularly weakening - was hit by two pieces of official communication today. 1. The central bank reduced the base rate and the O/N credit rate by 15bps, to 1.05% and 1.3%, respectively, leaving the O/N deposit rate at -0.05%, at the Monetary Council's regular monthly rate-setting meeting. This was just as expected, yet significantly forint negative of course, as the decision confirmed the MNB's strong loosening bias. Moreover, the MNB stated that returning to the 3% inflation target on the Bank's 24-month forecast horizon 'points to the direction of a further small reduction of interest rates'. Consequently, the Bank nearly promised a further rate cut in May, most probably to 0.9%, as far as the base rate is concerned. 2. Economy minister Varga handed in the draft 2017 budget to Parliament today. The draft has not been made publicly available yet, so at this moment, what matters is the announcement of the deficit target and of a few policy details. Most importantly, the ESA2010 deficit target was raised to 2.4% of GDP from 2% in 2016. Readers may remember that the 2017 deficit target was originally forecast at 1.7% of GDP in the government's Convergence Report of April 2015. The amended target marks an election budget prepared for next year and also an intended reversal of the deficit-cutting trend seen in recent years. This will most likely be in conflict with the EU's requirement regarding the structural deficit and - most importantly - negative for Hungary's chances for an early sovereign credit upgr...