Assessing the latest MNB rate cut and fiscal announcements

HUNGARY - In Brief 23 Apr 2015 by Istvan Racz

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That the MNB reduced its base rate by 15 bps to 1.8% on April 21 was almost a non-event in the sense that essentially everyone on the market expected exactly this. That the rate cut had absolutely no immediate impact on the EURHUF exchange rate, which has been stuck in a narrow 297-302 range over recent weeks is already more important. Given all the arguments we have brought up to demonstrate the unsustainability of the current EURHUF exchange rate, the outlook simply is that the MNB will have to cut the base rate further in May, and then continue its new rate cutting trend until the forint gets back to the more acceptable EURHUF 310 level or higher. It all depends on the global capital market sentiment to a great extent, but assuming no major change in the latter, we currently expect the MNB base rate at 1.3% at end-2015, so no change as compared to the conclusion of our recent quarterly report. The outlook on MNB action does not seem to be modified by the most recent announcements on fiscal policy either. Early this week, the government have just said that they intend to raise spending by HUF116bn (0.35%) in 2015, and they also want to cut taxes by HUF170bn (0.5% of GDP) in 2016, in addition to cutting the banking tax by HUF60bn, as previously promised. In fact, HUF15bn of the extra spending this year would be investment (the government would buy shares in Erste Hungary), and for the rest, they see compensation in higher than expected (= higher than 2.5%) real GDP growth, a likely HUF30-40bn better than planned net interest expenditure, and the use of fiscal reserves. So the deficit target (2.4% of GDP) would not be affected. For 2016, they expect 2.5% real GDP growt...