To Raise Or Not To Raise, That Is The Question

The debate currently taking place at the Hungarian central bank (the NBH) about the future course of interest rates is simply a reflection of the cleft stick that Hungarian monetary policy finds itself in at present. Raising rates will slow domestic growth and contain inflation, but it will also push up the Forint, and hence make it more difficult to export, and exports are what Hungary badly needs right now. No easy answers here:

According to the local media, National Bank of Hungary (NBH) Governor Zsigmond Járai said that a rate increase was not the only policy option on Monday, since the HUF rally would reduce inflationary pressures. Goldman Sachs has said on Friday the statement creates some downside risk to their forecast of a 25-basis-oint hike to 8.25% next Monday, since Járai is usually relatively hawkish in his comments. Goldman Sachs, however, sticks with its view.

At the last meeting, the MPC split three ways, with the doves supporting a pause and the hawks pushing for a 50-bp hike.

“We believe Monday's hike will be the final hike of the current cycle, but see some risk that the NBH will raise rates even further over concerns that inflation expectations are becoming entrenched," Rory MacFarquhar noted.

He expects inflation to peak at around 8% at the end of the first quarter next year.

But after that, he forecasts that “the contractionary effect of the deficit reduction programme will begin to outweigh the impact of higher tax rates and administered price increases."