Hungary will probably take a first step in dismantling its emergency monetary regime that has shored up the currency but has so far failed to make a major dent in the European Union’s highest inflation.
(Bloomberg) — Hungary will probably take a first step in dismantling its emergency monetary regime that has shored up the currency but has so far failed to make a major dent in the European Union’s highest inflation.
The central bank will hold its base interest rate at 13% on Tuesday, according to all analysts in a Bloomberg survey. Investors, however, will be more focused on signals surrounding the main monetary instrument: the key rate which now stands at 18%.
Following comments from central bank Deputy Governor Barnabas Virag last week, policymakers are expected to cut, from 25%, the top end of their rate corridor in a precursor to trimming the key rate as soon as its May 23 policy meeting.
But that approach also carries risks. Following Virag’s easing signal, the forint plunged 2% against the euro. While the currency has recovered some ground since then, all eyes will be on the central bank statement, as well as a news conference scheduled an hour after the 2 p.m. rate decision.
“The central bank will be calibrating the easing cycle to the currency’s performance,” said Eimear Daly, an emerging-market strategist at NatWest Markets Plc. “It may switch to a slower pace of rate cuts if forint really depreciates.”
The signal toward looser policy follows a months-long public feud between the central bank and Prime Minister Viktor Orban’s government, which has called for urgent rate cuts to counter a recession that’s now underway.
Policymakers had long rejected the suggestion but may now relent following a string of data where big drops in industrial and retail performance suggested a deepening contraction.
Potential reductions in the key overnight rate would start disassembling a tool introduced to prop up the forint after it plunged to an all-time low in October. Investors taking advantage of the EU’s highest official cost of borrowing have made it the best-performing emerging-market currency tracked by Bloomberg this year.
Along with the higher rates, the stronger forint helped put a ceiling on inflation, which peaked at 25.7% in January and has since moderated slightly.
But the currency isn’t out of the danger zone yet, and worries that rate setters may start easing policy too quickly could trigger a backlash, Societe Generale analysts wrote in a note.
Forint “sellers could re-emerge depending on how the central bank frames the outlook,” analysts Kenneth Broux, Santosh Ejanthkar and Tanmay Purohit wrote.
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