What Should National Bank Of Hungary Do To Keep EUR/HUF Fixed? | ING Economics

Hungarian Forint (HUF) May Be Rising! ING Economics Expects Bank Of Hungary To Hike The Rate By 100bp!

Central and Eastern Europe/EMEA: Our calls at a glance

Source: ING
Source: ING

National Bank of Hungary

Our call: Tightening continues at least until inflation peaks.

Rationale: Hungary's central bank has created a cleaner situation by levelling the base rate and the one-week deposit rate at 7.75% in June. The NBH has now hiked by a total of 715bp in 12 months. Despite the largest tightening cycle in the region, Hungarian assets remain under pressure due to political and geopolitical risks. The only realistic point of monetary policy impact remains the currency To keep EUR/HUF stable, the central bank needs to continue its decisive tightening at least until inflation peaks. Our base case is a 50bp increase per month with a terminal rate of 9.25-9.75% in September-October, where we see the highest probability for inflation to peak.

Risk to our call: With intensified upside risks in inflation and uncertainties regarding the rule-of-law dispute, we think the risk for interest rates is tilted to the upside. The fulfillment of risks might see new episodes of forint sell-offs, triggering extraordinary interest rate hikes.

Peter Virovacz

Czech National Bank

Our call: Stable rates until the end of this year and the first rate cut in 1H23.

Rationale: From 1 July, the CNB will be led by a new Governor, Ales Michl, and a new board. In our view, the central bank will thus undergo a significant transformation from the biggest hawk in the region to the biggest dove. The change in view is also supported by the central bank's expectation that inflation will peak in June. At the same time, we expect continued FX interventions to support the koruna despite the higher cost. We expect the first rate cut in 1H23, earlier than the consensus.

Risk to our call: The composition of the new board is the biggest risk that could change our call significantly. For now, we know little about the views of the new governor and board members. Recent statements so far imply a dovish shift, but we don't know to what extent. Moreover, we are skeptical about inflation slowing in the second half of the year, as the CNB expects, due to continuing rising energy and fuel prices. This may ultimately push the new board to raise rates further.

Frantisek Taborsky

National Bank of Poland

Our call: 75bp hike in July to 6.75%, rate hikes continue towards 8.50%.

Rationale: After hikes from 0.1% to 6% in June, the NBP governor has switched to a dovish tone, though we still see further hikes despite that. The persistent rise in core CPI points to large second-round effects. Our own survey shows very high inflation expectations (30% of Poles see CPI between 20-40%). Moreover, with more than 3% fiscal stimulus the policy mix only recently turned contractionary. Not only does this mean high CPI, which should peak at 15-20% in 2H22, but also a C/A deficit. It turned from 3% of GDP surplus to 3% deficit and should reach a deficit of circa 5% at the end of 2022. In the coming months, the NBP governor will be sensitive to slowing GDP growth but should keep hiking to contain CPI and prevent Polish zloty depreciation. The zloty fundamentals deteriorated recently. In the short term, inflation fears may soften due to a slower rise in food prices in the summer, but long-term challenges remain and should resurface in 2H22 and the beginning of 2023.

Risk to our call: The monetary policy council getting excessively dovish during the summer due to their worries about a GDP slowdown, but the inflationary backdrop in Poland is the worst in the CEE region, which should backfire via a weaker zloty.

Rafal Benecki

Central Bank of Turkey

Our call: Interest rates remain on hold for the rest of the year.

Rationale: We have seen some policy moves lately with the objectives of:

  • Putting a break on commercial TRY loan growth.
  • Strengthening FX reserves.
  • Aiming to divert local demand away from FX.
  • Strengthening demand for local government bonds.
  • Increasing the appeal of TRY assets for foreign investors.

The CBT has signalled that it will not change its course and continue to use these types of measures rather than a direct policy rate adjustment.

Risk to our call: After a pronounced TRY weakness in recent weeks and pressure on reserves, we see a stabilisation in net reserves (excluding swaps) thanks to a wave of measures, particularly impacted by higher FX selling requirements for goods and services exporters, out of their FX revenues. Given there has been no change in policy direction to prioritise inflation and allow a normalisation in real rates, risks to the macro outlook will likely remain a key concern depending on exchange rate developments and higher price pressures.

Muhammet Mercan

National Bank of Romania

Our call: Terminal key rate at 6.00% by the end of 2022.

Rationale: The key rate gap versus the CEE3 peers (Poland, Czechia, Hungary) has widened even more since NBR’s last meeting in May. Moreover, the above-expectation GDP numbers are likely to make it easier for the NBR to at least maintain its 75bp hiking pace at the July and August policy meetings, though larger hikes cannot be excluded. However, this would hardly be considered a hawkish surprise as the market perception seems to be that the NBR is still far behind the curve.

Risk to our call: The pace of rate hikes in the CEE3 space doesn’t seem to be slowing down and NBR will be forced to follow. On the other hand, eventual rate cuts are less likely to be followed over the next couple of years.

Valentin Tataru

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Hungarian Forint (HUF) May Be Rising! ING Economics Expects Bank Of Hungary To Hike The Rate By 100bp!

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