KBC: Hungary ready to bring more action to win IMF’s help?



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KBC: Hungary ready to bring more action to win IMF’s help?

27.09.2012 11:37 Thursday
Beside forint’s losses, which were triggered by MNB’s rate on Tuesday, Hungary was again at the top of regional news. Government's chief negotiator Mr Mihaly Varga said that the government is considering new measures to reach an agreement with the IMF. This may include capping social subsidies, health care contribution or restructuring government entities.

We think this is generally positive, but not important now because the government is trying to delay the IMF loan as long as possible. The debt management agency recently announced issuance of domestic euro denominated bonds. This may help the government to collect additional money to repay IMF/EU loan redemptions of €4bn per year, but it may also hurt banks. The risk is that if domestic commercial banks see decreasing deposit level, they may raise the interest rate on Swiss franc loans.

Today, the CNB interest-rate-setting meeting will be in focus. The Bank Board is likely to cut its two-week repo rate again, to a new all-time low of 0.25%. The fact that the debate on a possible rate cut is not yet over is indicated by the outcome of the CNB Board’s last vote, when two out of six members were in favour of a rate cut. Meanwhile, additional unfavourable figures came from the economy, indicating a faster drop in GDP and consumption in the second quarter of the year and slightly lower inflation.

Hence dovish calls to signal another rate cut started to be heard from the CNB. Not only the weaker performance of the economy but also the deterioration of the outlook for the euro area and the development of the Euribor favour a rate cut. Even the possible use of non-standard instruments, of which the CNB Governor has spoken in general in the media recently, may be discussed at the forthcoming CNB Board meeting. Nevertheless, we see very little likelihood that non-standard measures (the Czech version of QE) would be not only discussed but also employed at the moment.



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