Further emphasis on loosening talk, no rate cut likely at tomorrow's MC meeting

HUNGARY - In Brief 22 Feb 2016 by Istvan Racz

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At tomorrow's rate-setting meeting, the Monetary Council is unlikely to cut the 1.35% base rate, but it will most probably put further emphasis on its usual loosening talk, rewording their communique, reiterating previous commitments to use de-sterilization measures and swaps to ease monetary conditions, and possibly refining some of their non-conventional measures, e.g. by improving the pricing of IRS contracts further. At present, the problem to handle is the strong forint, as EURHUF has fallen to 307.5-308 in recent days, implying a 1.4-1.8% forint appreciation this year, against the euro that has also strengthened against the USD. This amounts to tightening monetary conditions, as the average EURHUF rate was 309.9 in 2014, which is contrary to official intentions to ease at a time when EU transfers are temporarily not available and fiscal policy is quite tight (see the cash surplus in January). It must be said clearly that the current EURHUF level cannot be allowed to stay for long if the authorities want to see GDP growth anywhere close to their 2.5% GDP growth forecast (essentially an informal target) for this year. But weakening the forint will not be easy, at a time when the current account is in massive surplus, which is likely to widen if domestic growth is decelerating, plus the government keeps talking about intensifying fiscal tightness, with a view to improving chances for an early credit upgrade from Fitch Ratings and the others. We reported the other day on an unfortunate statement by economy minister Varga - on plans to prepare a zero-deficit budget for 2017 - which, as it has turned out since then, followed by an even more unfortunate statement of the...