Bancherul - BANCI / ENGLISH / Hungary: MNB maintains hawkish stance

The Hungarian central bank today hiked its key policy rate by another 25bp to 8.50%. This was both the consensus expectation and our own, said Danske Bank.

If anybody deserves a prize for being a cautious central banker in CEE it must be the Hungarian central bank governor Andras Simor.

Despite continued very weak domestic demand and a currency that has held up remarkably well during the global credit crisis, the MNB governor and his colleagues have maintained a very cautious or even outright hawkish stance in monetary policy.

Mr Simor no doubt deserves some credit for keeping FX volatility relatively low and keeping inflation expectations relatively anchored. Today rate hike cements this fact. Looking forward, however, there is also good reason for the MNB to be less aggressive, especially taking into account that growth in the Hungarian economy is not showing any major signs of improvement.

GDP growth did rebound a little in Q1, but this was mainly driven by exports and not domestic demand. Hence, demand side pressures on inflation remain small.

However, the MNB also published the updated inflation report. The staff raised inflation projections, and now MNB expects 2008 average CPI at 6.3% y/y (up from 5.9% y/y), with the forecast for 2009 4.2% y/y (up from 3.6% y/y) - above the upper limit of the tolerance zone around the 3% target due to a rise in food and energy prices. This could indicate that MNB has not finished
its rate hiking cycle.

We will adjust our rate expectations next week.

Rates and yields are up roughly 5bp while the forint remains stable following the decision in a very thin market with US and UK closed. The rate hike is supportive for the Hungarian forint itself, but we do not see much upside for the currency going forward due to the expected growth slowdown in Euroland.