Tomorrow's Monetary Council: most analysts expect a little tightening of some kind

HUNGARY - In Brief 25 Mar 2019 by Istvan Racz

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The Monetary Council is to hold its March rate-setting meeting tomorrow, this time combined with the discussion of the Q1 inflation report, i.e. an especially good time to carry out a policy change if any. Most analysts seem to agree that some kind of tightening is likely on this occasion, but the consensus is that the tightening will likely be small, and there is no agreement on what exact form it is likely to take. About half of those analysts who expect tightening (and roughly 40% of all, as far as we know) believe that the O/N deposit rate will be raised by 10-15 bps, whereas a somewhat bigger crowd thinks that tightening will likely take the form of a schedule to reduce the outstanding stock of FX swaps, without any interest rate hike. No one, as far as we know, expects the MNB to raise the 0.9% base rate on this occasion.Our expectation is a 25bps increase in the O/N deposit rate, together with hints that more might come in due course if the initial step proves inadequate, and all this may be combined with a mildly restrictive plan on the quantity of FX swaps.Regarding arguments, everyone seems to agree that the existing trend of domestic inflation requires tightening. However, much of uncertainty, as regards the forecast, comes from the fact that the world (and within that the European) economy is cooling, and that the MNB has a well-known and significant pro-growth bias. In our view, no tightening tomorrow could disappoint the market and lead to a weaker forint, and that would carry an unacceptably high amount of risk regarding the prospects for domestic inflation.Analysts (including us) seem to believe that raising the base rate is something the MNB very much ...