ING's call

Change in the base rate

The rationale behind our call

Usually, we start our preview by assessing the latest set of incoming data, and comparing this to the National Bank of Hungary's forecasts. However, monetary and fiscal policy communications have been the dominating forces in the past couple of weeks.

The central bank has flagged an upcoming shift in approach: it is ready to give up on aggressive rate hikes in exchange for a more gradual tightening cycle. Our view is that such a change might be a response to the rising uncertainty whereas the general expectation is that Hungary is getting closer to the peak in inflation amid mounting negative risks in economic activity.

This cautious approach might translate into a lengthier tightening cycle compared to the expectations laid out in March (the latest official NBH Inflation Report) but this doesn't necessarily mean an outright shift from being less hawkish in terms of the total volume of tightening over the remainder of the year.

Previously, the central bank said that the rate hike cycle will end when the convergence of the base rate and the 1-week deposit rate comes to an end. A slower pace of base rate hikes while maintaining (+30bp) effective hikes in the 1-week depo rate could mean a longer tightening cycle and a higher terminal rate, compared to the original view when this pledge was made. If our view is right, telegraphing this message could be the most important challenge facing the National Bank of Hungary.

Obviously, the recent sell-off - a result of new taxes levied on specific sectors to cover the budget gap - will not make the situation any easier. With EUR/HUF being in the 390-395 range, the pro-inflationary pressure mounts further. As a base case, we see the central bank enacting a 60bp base rate hike on Tuesday followed by a 30bp hike in the 1-week deposit rate. Should we see EUR/HUF weaken further, the NBH might need to make a bolder move, hiking both the base rate and the 1-week deposit rate by 60bp each, reacting to the idiosyncratic market shock.

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