MNB paves the way for re-opening of rate easing cycle

The National Bank of Hungary surprised markets last Tuesday with a 15bp cut, lowering the benchmark rate to 1.20%. Although markets have expected further easing steps, the move came in ahead of market expectations. The central bank took the step citing low imported inflation, European Central Bank (ECB) easing measures and continued slump in oil prices .

MNB also lowered the overnight lending rate to 1.45% from 2.1%. The overnight deposit rate is now in negative territory from 0.1%.to -0.05%. The bank also lowered its forecast for inflation this year. The bank now expects inflation to be around 0.3% as compared to the previous expectation of 1.7% announced in December. The target inflation the bank seeks to achieve is 3%.

The bank made a sharper cut to inflation forecasts and this has formed the basis for the rate easing cycle to be re-opened this month. Although incoming macroeconomic data indicate the Hungarian economy is slowing down, this is likely only a temporary hiccup.

"We keep our GDP forecasts of 2.2% in 2016 and 3.0% in 2017 unchanged from last month," Citibank said in its latest research note.

"We expect the policy rate to be lowered to 1% or below over the coming quarter. We see EUR-HUF gradually rising to 320.00 over the coming months," said 4castweb in a report to clients.