Hungary MPC opts for cautious 25bp cut

January 26, 2010

The MPC has lowered the policy rate by 25bp to 6.00%, in line with consensus expectations, though less than the 50bp we anticipated. At a brief press conference held in the afternoon, Governor Simor noted that the decision received a convincing majority, suggesting that the Board probably voted on a motion of reducing the policy rate by 50bp but that it received 1-2 votes at most. The NBH reiterated that inflation will remain temporarily high as a result of the lagged impact of the tax hike and commodities prices, but should fall below the 3% target in the second half of the year. Core inflation, which in the medium term reflects demand developments, is expected to fall substantially below 3% in the coming 1-2 years. The Board noted that some of the concerns that sparked risk aversion in December had subsided. However, markets remain concerned about the long-term debt sustainability of some of the developed markets. As a result, the Board believed that maintaining a cautious stance is the best way forward and reiterated that although further cuts may be warranted, given the inflation and GDP outlook, such changes can only be delivered if the risk perception attached to Hungary allows it. The MPC signalled clearly that it will maintain a cautious stance going forward and the magnitude of the monetary easing will be heavily dependent on the success of the next government in continuing the path of fiscal consolidation. Provided the risk appetite does not deteriorate from here, the Board is likely to continue to deliver 25bps rate cut moves in the coming months. A temporary pause may materialise around the April general elections. We maintain the view that although a small overshoot of the 2010 deficit target is likely, Fidesz should overall maintain prudent fiscal management and therefore allow the NBH to slowly take the policy rate down to 4.50% later this year.