Merger to Finalize by September: NBH to Continue Gradual Rate Cuts, Forint Normalizing, HGBs Valuations Attractive

Merger to finalise by September

If the environment remains supportive and market stability is maintained, the NBH is going to continue its series of gradual interest rate cuts of 100bps. In our base case, the base rate and the effective rate should merge accordingly at 13% at the September rate decision. There was a minor tweak to the forward guidance in the latest press release, with the term “prolonged period” being dropped as the Monetary Council assessed that maintaining the current level of the base rate will ensure price stability. We believe that this tiny shift might be the first hint that, following the expected merger of the effective rate with the base rate in September, easing will continue without a pause. In our assessment, this would be roughly in line with recent market pricing.

 

Our market views

The Hungarian forint is gradually normalising following the sell-off two weeks ago, which affected the whole region. We see global momentum and market overvaluation as the main reasons as local conditions improve. The market sell-off has likely lightened the heavy long positioning and we believe the massive carry will once again attract market interest. In addition, we think the market is pushing NBH to cut rates at a faster pace and the hawkish tone should be a boost going back to EUR/HUF 370.

In the rates space, we see that the very short end of the IRS curve has moved significantly lower in recent weeks due to the market wanting to see a more dovish central bank in the face of better macro numbers. However, our base case is that the NBH will not move away from the set course and these bets will be disappointed. In general, we see more steepening of the curve in the 2s10s spread, but a very short end. The FRA curve should see some repricing up this week, resulting in flattening in this segment.

Hungarian government bonds (HGBs) eased in July and the rest of the region caught up with the swift rally. We therefore see current valuations of HGBs as more justifiable, which could attract new buyers. Despite the fiscal slippage risk, YTD issuance has reached 60% by our calculations, which we see as more than sufficient. Moreover, recent government measures supporting HGBs and the fastest disinflation in the region should be enough to sustain demand.