Hungary Watch: MNB moves to orthodoxy
The MNB increased key interest rate by 185bp to 7.75% and gives up its perplexing double-rate system. Rate hike cycle lasts until the rise of the monthly inflation reading does not stop. In our view this means 9.75% terminal rate in October. HUF nervousness calmed down and EURHUF moved below 400, but it is not a game-changer for the HUF.
The MNB has decided to give up its double-rate system on its recent rate setting meeting (28 June) and to increase the base rate by 185 basispoints from 5.9% to 7.75%. Accordingly, on the next 1-week deposit tender (30 June) we will see a 50bp rate hike (from 7.25% to 7.75%) to close the gap between the two instruments. This is the orthodox shift in monetary policy most market players were demanding earlier (including us). Nevertheless, the MNB claimed that it keeps the 1-week deposit facility and therefore the possibility to change it anytime if it is necessary (i.e. any Thursday), though the change will be followed by a similar change of the base rate in the next rate setting meeting. The HUF strengthened upon the news: EURHUF moved from 402 to 398.
The MNB also communicated that it will continue the rate cycle until the rise of the monthly inflation reading lasts. While the MNB did not mention the pace of the monthly rate hikes, we expect 50bp rate hikes going forward. According to our forecast, inflation is going to peak in Hungary in September at 13% yoy (the data is going to be published on 11 October) and the first monthly inflation data that may display the break of the rising trend is the October inflation statistics (to be published on 9 November). If our logic proves right, then we will see another four rate hikes, 50bp each (July, August, September, October) before we reach the terminal rate at 9.75%. Of course, there is certain risks around this scenario (with regards both to our inflation trajectory and to our assumption on the pace of the rate hikes).
The MNB also announced its key forecasts from the upcoming June Inflation Report (to be released on 30 June). MNB’s new GDP forecast is 4.5%-5.5% for 2022 (vs. 2.5%-4.5% in the March Inflation Report) 2%-3% for 2023 (vs. 4%-5% previous) and 3%-4% for 2024 (unchanged forecast). In our reading the 2022 forecast does not calculate with the possibility of a European energy crisis, though MNB’s 2023 forecast fits our baseline scenario (2% GDP growth in 2023). As far as the inflation outlook is concerned, MNB has raised significantly both 2022 and 2023 forecast: from 7.5%-9.8% to 11%-12.6% (2022) and from 3.3%-5% to 6.8%-9.2% (2023). We forecast 11% (2022) and 8% (2023) – pretty much in line with the MNB. Nevertheless, the MNB keeps its optimism for 2024 (2.5%-3.5%) versus our 5% call. Apart from the 2024 outlook (which is still far away) the new MNB forecasts are realistic ones.
Altogether, we evaluate today’s decisions as an important step towards an orthodox monetary policy direction. This helps the credibility of the Hungarian monetary policy and gives some support to the HUF. However, there are other major drivers of the HUF which remain intact (war in Ukraine and its negative consequences; lack of agreement on EU funds between the European Commission and the Hungarian government; general vulnerability of the Hungarian economy due to its high public debt-to-GDP ratio and high energy dependency on Russia versus peers). Accordingly we expect the HUF to stabilize around the current levels versus the EUR – potentially and inch below 400 and not above.
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Zoltán TÖRÖK
Hungary Zoltán Török is the Head of Research at Raiffeisen Bank Hungary. He joined Raiffeisen in 1997 as a macroeconomic analyst, later became the chief economist at Raiffeisen Securities and Investment and holds his current position since 2004. His main focus is on the Hungarian macroeconomy and the banking sector. He got his M.A. degree from the Central European University and his PhD from Budapest Corvinus University. He is a frequent speaker at conferences, an Op-Ed columnist in major professional sites in Hungary and teaches a university course on international finance. In his spare time, he enjoys various outdoor activities (running, cycling, hiking).
The flash estimates of PMIs for the US and euro area caused some disillusionment in regard to the economic outlook. Upcoming data are likely to underline a weak industry and growth outlook in CE. Meanwhile, the change of pace in monetary policy in CZ will not be mirrored in HU.
Recent days have been full of hawkish central bank surprises. With inflation climbing higher also among advanced economies, central banks are eager not to fall behind the curve. The SNB surprised with a 50bps hike, the FED even hiked by 75bps and the ECB held an ad hoc meeting to bring down peripheral spreads. On FX markets the Swiss franc appreciated strongly on the news, while EUR/USD was more undecided between an aggressive FED and declining EUR risk premia. That central banks cannot always do the trick was visible in Hungary, where the HUF strengthened only mildly on an extra 50bps hike by the MNB. Next week it's the CNB's turn, which intervened quite regularly on the FX market in recent weeks. In SEE the currencies of the region have benefited lately and that's with the summer having only just started. |