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Friday, February 08, 2008

Is The Next Move At The NBH A Rate Hike?

Well markets are certainly simmering at the moment. As I keep arguing monetary policy in Hungary is now in some sort of a trap, caught between the rapid internal contraction, and the need to let the currency slide to do something to address the competitiveness of exports on the one hand, and the problem of inflation and the need to defend the forint to protect unhedged swiss franc domestic borrowers on the other. That fiscal policy is also caught in another kind of trap only adds to the sense of drama that is unfolding.

As I report in an update on this post, the market seems to be virtually pricing in the idea that the next move in interest rates at the central bank will be upwards. As Gábor Orbán, portfolio manager at Aegon is arguing, given the way which inflation expectations are rising over the relevant policy horizon, credibility maintenance would seem to demand a rise. Put another way, any loss of this sort of credibility could now easily provoke a rout.

In fact yields in the fixed-income market have gone up strongly in recent days, and based on the yield of the 3-m discount T-bill - which rose today by 12 bps to 7.72%, certainly make it look like the market has priced in a 25-bp rate hike by the central bank. This is a very drastic change in a very short time, and even as late as mid-January investors were pricing in a moderate rate cut for late spring. However in the short term, a lot of investors in the currency markets seem to be betting on the likelihood of a rate cut to keep the forint weak. If this bet doesn't come off, and people need to reset their positions, this in itself could precipitate a bout of instability with unknonw consequences. Meantime over the week the forint fell by 3.5% versus the euro and by 5% to the USD.

Another symptom of the present atmosphere is the way in which rumours are circulating with such frequency. This is very typical of the kind of situation which Hungary is now in. On Wednesday the rumour had it that Finance Minister János Veres and Prime Minister Ferenc Gyurcsány were about to announce their resignations, today the rumourology was suggesting that the the NBH was planning to hold an extraordinary press conference on Monday to address the current situation - and possibly to announce in true US Fed style an "emergency rate rise". Of course the NBH has issued a denial, and the rumour was very unlikely to be true, but it does indicate just how much people have now got the jitters. It is one of these bouts of jitters - either in Hungary or in the Baltics - that is in fact likely to push the whole edifice clear off the cliff face.

Meantime the Monetary Council of the NBH will hold a non-rate-setting meeting on Monday as scheduled, and hold a first reading of the cenbank's Inflation Report to be released two weeks later. So for the time being things are likely to calm down again. The next "hot spot" will come on Thursday when Hungary's preliminary fourth-quarter GDP data will be released as will the January inflation figures. Any realisation of the anticiipated downside risk on the former and upside risk on the latter (or, worst of all case scenarios, the two together) will be the next excuse for another bout of nervoes market sentiment which could then well run all the way up to the 25 February policy meeting and Inflation Report. And if none of this is good enough to get the rilers really riled, well then we will have the lead in to the March referendum for people to occupy their time and energy with.

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