Post-rate-cut EURHUF and declining fixed investment in Q1 point to further monetary easing

HUNGARY - In Brief 29 May 2015 by Istvan Racz

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1. The MNB's third cut in a row of its base rate on May 26, by another 15 bps this time and by a total 45 bps in total over the last three months, to 1.65%, has not affected the EURHUF immediately, which is no big surprise, as the move was fully in line with the broad market consensus. 2. However, the total impact of the three consecutive rate cuts on the exchange rate has not been insignificant, as the forint's previous 2% appreciation against the average EURHUF rate of 2014 (308.66) has been wiped off completely. Today, the forint is trading around EURHUF309. 3. Given this impact on the exchange rate - the single most important factor in determining Hungarian inflation and growth - and also the recent initial recovery of CPI-inflation, a legitimate question is if the MNB is going to continue its renewed easing cycle in June? 4. Our quick answer is a definite yes: we expect another 15 bps cut in June, to 1.5%. Please, bear in mind that continuation of the current EURHUF rate would still keep the average EURHUF for 2015 slightly below that for 2014, meaning a small HUF appreciation for this year. This could be devastating for growth, because of the declining EUR prices of merchandise exports and imports (-3.1% and -3.6% yoy, respectively in Jan-Feb 2015), through decreasing sales prices and sharply declining profitability. 5. This morning's data from the KSH has provided further evidence that continued monetary easing is likely. Fixed investment by the government and enterprises fell 1.1% qoq / 4.5% yoy in Q1, meaning that its moderately sliding trend from the pre-election peak of Q1 2014 was maintained. 6. This fresh data shows that the ongoing last-minute rush to use...