The MNB issued a new signal on the forint today

HUNGARY - In Brief 24 May 2016 by Istvan Racz

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Just as expected, the MNB reduced its base rate and O/N credit rate at today's monthly rate setting meeting, to 0.9% and 1.15%, respectively. But contrary to market expectation, the Monetary Council indicated that the easing cycle of latest months has come to an end with this step. As a consequence, the forint strengthened slightly, from over EURHUF 317 to below EURHUF 316 during the day.The important point is the fact that today's rate cut was carried out at a relatively weak trading level of the forint. By doing this, the MNB indicated that it did not mind the forint's current relative weakness, just outside the EURHUF 310-315 range which the currency was holding until recently. But at the same time, it also signaled that it was not aiming at weakening the forint aggressively, towards EURHUF 320.This was probably a reaction to the unexpectedly weak GDP data, and the fact that the general government budget had hardly any deficit, in Q1 2016. The lower base rate and a somewhat weaker forint looks like a small contribution by the MNB to Hungary's fight for a decent GDP growth rate in 2016, somewhere close to the 2.5% official forecast. Achieving that objective will need more than just this contribution from the central bank: notably, fiscal policy will have to become looser, and the distribution of EU transfers will have to accelerate in the rest of 2016, for Hungary to get even 2% GDP growth this year. At present, we expect 1.5% growth in 2016.In our view, base rate cuts may still be renewed in the rest of 2016, depending on the external environment and domestic success in revitalizing the economy by tools other than monetary policy. But the MNB has been always moving ...