Narrowing Forecasts and Market Expectations: Insights on the National Bank of Hungary's Monetary Policy and Market Views
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What about the forecast changes?
Perhaps the most important change will be that, as the extreme risk scenarios have now disappeared, the central bank will hopefully also narrow the updated forecast ranges when it presents the main figures in the June Inflation Report. A narrowing of the forecast range downward would send a rather strong message regarding GDP growth in 2023. This would put the central bank in the ranks of those who do not think it likely that GDP growth of 1.5% will be achieved this year. However, as the economic outlook now depends largely on the performance of agriculture, it may still be justified to maintain a wider band.
ING's expectations regarding the NBH's forecasts
There is a lot of uncertainty around GDP growth next year, so perhaps there is no point in seriously revising expectations. As for inflation, the NBH is likely to raise its forecast, if only because of the change in the excise duty from 1 January 2024. In addition, an inflation rate clearly above 3% could also send an important message to markets, supporting the central bank's new stance that sustained tight monetary policy with a continuous real positive interest rate environment is needed to achieve the inflation target in a sustainable manner.
Our market views
The Hungarian forint has come under pressure for the first time in a while, reaching its weakest level against the euro since the end of May. We see EUR/HUF in a 368-378 range for the rest of the year and see the current higher values as only temporary. The market will probably want to wait for the NBH meeting to see how it sees the situation. However, we believe the market will use weaker forint levels as an opportunity to build new positions and benefit from the highest FX carry within the region. Thus, we expect the forint to return more towards the lower end of our range around EUR/HUF 370 next week.
In the rates space, we see the market more or less fairly pricing in the rate cuts this year and the super short end is thus anchored. However, looking at the longer 1-3y horizon, we see room for the market to further price in some normalisation of NBH policy. Our long-term view thus remains unchanged and the 2s10s spread should steepen with the entire curve moving lower, and catching up with the market. In the short term, for next week, we see major scope for a move within the short end of the curve and a flattening in the 1s3s segment that may get the market's attention.
Hungarian Government Bonds (HGBs) have had a massive rally in recent weeks and are posting the highest overall returns in the CEE region this year. We continue to like HGBs, which benefit the most from the whole story in Hungary, further supported by government measures and funding fully under the control of the debt agency. In the coming days, we could see some profit-taking and upward yield pressure from core rates, however, we still see HGBs as expensive relative to CEE peers. On the other hand, it is hard to see a significant trigger for a sell-off and we expect the market to continue to like HGBs.
