Hungary to Buck Global Pause With Start of Monetary Tightening
(Bloomberg) -- Ever the maverick, Hungary’s central bank is poised to buck the global trend and start unwinding more than half a decade’s worth of monetary stimulus. With other central banks around the world scaling back tightening, the question in Budapest is by how much.
Core inflation exceeding the 3 percent target in February sent a "very strong signal" to Hungarian policy makers that it can start dismantling a web of unconventional measures next week. But with the European Central Bank adding to stimulus and the Federal Reserve saying it may stop hiking, analysts are almost evenly divided on how far the Hungarians will go: some expect a hike to the overnight deposit rate and others forecast it remaining on hold.
"March is a done deal," said Mai Doan, an analyst at Bank of America Corp. "But an increasing dovish global backdrop suggests no commitment to future moves."
A majority of economists surveyed by Bloomberg expect a reduction in the 2 trillion forint ($7.2 billion) of liquidity injected into the economy via foreign currency swaps. But they’re almost evenly split on whether a hike in the overnight deposit rate is coming as well at the meeting that will set out policy for the next three months on Tuesday. No one expects a move in the benchmark three-month rate.
The central bank has made clear that its march back to higher interest rates will be "gradual and cautious." Investors have trimmed their expectations of rate hikes and are betting on an increase of less than half a percentage point in the 3-month Bubor rate by year-end, according to forward-rate agreements. That’s about a quarter point smaller than what the market expected at the beginning of March.
The forint could also be heading into turbulence, as traders who pushed the currency to an 11-month high against the euro re-evaluate the tightening narrative. Bonds could also extend their gains that have placed 10-year notes on track for their best week since Sept. 2017.
"The National Bank of Hungary could make a dovish hike, with soft forward guidance that would not automatically indicate further rate hikes," Guillaume Tresca, an analyst at Credit Agricole SA, said in an emailed note. "There is room for disappointment as the market is pricing in aggressive tightening."
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