KBC: The forint faces some selling following the MNB decision

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KBC: The forint faces some selling following the MNB decision

26.09.2012 10:29 Wednesday
The Monetary Council of the Hungarian central bank voted 4-3 for another 25 bps rate cut with all internal members voting for un-changed rates and all 4, government appointed members for a cut. We think the ongoing recession warrants lower rates as domestic demand looks depressed even though inflation running at 5.8% Y/Y because there are one-off effects behind high inflation.

The challenge for Hungary is, however, to maintain attractiveness for foreign investors in order to keep or increase their bond holdings because domestic demand is simply not enough to cover the budget deficit.

We think yesterday’s decision was too risky and market expectation for a gradual rate easing of 25bps every second month would have been a better strategy. Further weakening of the currency however may trigger substantial increase of short-term rates and thus could act as a defence, especially if council members indicate that the easing cycle could stop.

Hungarian markets reacted negatively to MNB’s rate cut decision. The EUR/HUF weakened about 1% to 285.50 by this morning also influenced by more negative news from the global market outlook as long-term bond yields started to decline.

KBC

kk



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