Still no rate cut is likely at the March 28 Monetary Council meeting

HUNGARY - In Brief 26 Mar 2023 by Istvan Racz

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Predicting the outcome of the March 28 rate-setting meeting, when the MNB's Q1 inflation report is also due to be discussed, appeared quite easy around the middle of this month. By that time, the forint had depreciated to around EURHUF 395, at which level any reduction of the sterilisation rate looked much less justified and urgent than at the previous highs of EURHUF 375-380. However, the forint has appreciated back to EURHUF 385 since then, that is quite close to the range, which we did not, and still do not, expect to survive Q2, for being unsustainable from the economy's external competitiveness point of view. So, predicting the March 28 decision looks a somewhat more difficult call once again. But we still do not believe that the Council would risk such an early rate cut. The ECB is still in tightening mood (the FED's approach has become less evident lately), inflation has only decreased by a tiny bit in a single month so far, the labor market still appears to be quite tight, with the unemployment rate having risen to 4.1% in February from 3.8% in December, and the January BOP just did not seem to provide the forint with any significantly improving fundamental support. Most lately, the February cash budget figures were released, which allow pretty much the same conclusion. According to those, the central government's cash deficit reached no less than 13.4% of GDP in January-February. This was less than the 15.1% recorded in the first two months of last year (see the chart below), but that was the extraordinary result of massive election campaign spending at that time, when the government returned a full year's income tax to young families, to get more votes. Early...