The Week Ahead

Well this looks like being a busy and active week in the Hungarian financial markets. Global conditions are hardly calm, and we face a slew of potentially very revealing macro economic data. The Monetary Council of the Hungarian Natioinal bank is holding is to hold a non-rate-setting meeting today. Although we are unlikely to see any surprises here, it does give members of the council an opportunity to make their views known to the press in a way which might be considered as "steering" future expectations.

With this in view Monetary Council member Péter Bihari has not let us down, since this morning he went on the record as saying that needs to raise interest rates to defend its inflation target and narrow the gap between the base rate and much higher government debt yields. Since Bihari is regarded as a somewhat dovish member of the 12-strong MPC, his remarks are important, and especially the fact that he argues for monetary tightening in connection with the rapid incrrease in yields we have ben seeing in the government debt market. Bihari's statement could also be regarding as presenting the more or less "politically correct" view in the face of the recent statement from fellow policymaker Tamás Bánfi to the effect that it was no longer realistic to target 3% inflation for 2009.

More evidence of market expectations for an imminent rise in interest rates came this morning when Hungary's Government Debt Management Agency (ÁKK) sold at auction HUF 40 bn 4-week liquidity discount T-bills at an auction on Monday. The offer was well oversubscribed and the original amount on offer went for an average yield of 8.90%, a rate which could be interpreted as indicating that the market expects a rate hike (or hikes) of some 150 basis points over the coming month or so.

Of course the yield on government bonds indicates that interest rates should move in one direction, while some of the fundamentals being expressed in the macro economic data we are going to get sight of later in the week may well suggest they should in fact move in the opposite direction. Tomorrow the Central Statistics Office (KSH) will publish the January construction data, while the Finance Ministry is scheduled to hold a press conference giving details on February's budget processes. Last week the ministry reported a HUF 215.9 bn deficit for the second month of the year, better than the previously projected a gap of HUF 219.8 bn (on a cash-flow basis, excluding local governments). The finance ministry will almost certainly be very vigilant on these numbers in the coming months, since they will almost certainly want to avoid and suggestion that they are loosening the fiscal purse strings in the aftermath of the recent referendum. Indeed Prime Minister Ferenc Gyurcsany was notably at pains to reassure markets in the Hungarian Parliament this morning, stressing the fact that Hungary's government may now have even less room to reduce taxes in 2009 after voters on March 9 abolished a number of medical and university tuition fees.

The referendum, in which Hungarians voted against the government's measures by a margin of four to one, may unnerve investors and increase borrowing costs, eating into funds for the tax cuts, Gyurcsany said. The Hungarian government had been discussing tax cut proposals worth as much as 250 billion forint ($1.5 billion) to boost economic growth, which was down to an annual 0.8 percent in the fourth quarter, the slowest in 11 years. Hungary is currently trying to reduce the widest budget deficit in the European Union, from 9.2 percent of gross domestic product in 2006 to 3.2 percent next year, and the earlier talk of tax cuts had raised criticism from the European Comission and the Ratings Agency Standard and Poor's.

Then on Wednesday the KSH will publish January employment and wage data while on Friday we will have the January retail sales figures. As I say, the combination of all this macro data should enable us to carry out some sort of effective interim weather check on the state and prospects of the Hungarian economy, always provided, of course, that developemnts in the golbal financial markets leave us with the tranquility to be able to do so.