The Deliberate Comments of Deputy Governor Virág: Anticipating a 100bp Rate Cut by National Bank of Hungary
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The comments of Deputy Governor Virág were deliberate
However, on 17 January Deputy Governor Virág spoke at the Euromoney conference in Vienna, and his remarks tilted our rate cut expectations from 75bp to 100bp. He conveyed the message that: “based on the information available, there were as many reasons for a 75bp cut as there were for a 100bp cut at the January meeting”.
We believe that these comments are more likely to indicate an increase in the pace of rate cuts, as they were made in the context of weighing the favourable developments in internal factors against unfavourable developments in external factors
Our call
Against this backdrop, we see the National Bank of Hungary cutting the base rate by 100bp on 30 January. This could bring the key rate down to 9.75% after the rate-setting meeting, while we expect the Monetary Council to also cut both ends of the rate corridor by 100-100bp. There remains one major factor that poses a downside risk to our call and that is FX stability. We believe that if we were to see a further marked deterioration in EUR/HUF, this would encourage the central bank to remain more cautious and maintain the previous pace of 75bp of easing.
However, as the central bank will certainly remain in data-dependency mode, this does not mean that 100bp cuts will be automatic going forward. Rather, we expect the NBH to cautiously assess both internal and external developments and act accordingly on a meeting-by-meeting basis.
Our view on the pace of disinflation has not changed, as we expect disinflation to continue forcefully in the first quarter, but then to stall from the second quarter onwards as base effects reverse. This means that, on the basis of current information, we expect the pace of rate cuts to be reduced at the March meeting.
Our market views
The Hungarian forint outperformed its CEE peers significantly in the first days of the year with lows below 378 EUR/HUF. However, we turned negative on HUF ahead of the December inflation reading due to significant divergence between FX and rates, which proved to be the right decision. HUF has since weakened by 2% flushing out the long positioning that the market had built in the last two months. Of course, EUR/HUF is one of the main, if not most important, factors influencing the speed of the NBH rate cut.
CEE currencies vs EUR (end 2022 = 100%)
For now, we think EUR/HUF levels of 386-387 are still comfortable for the central bank, however, we believe that above 390 the NBH would start to consider a more cautious approach with a hard stop above 395, i.e. only a 75bp rate cut.
We believe the gap between FX and rates that we pointed to earlier has been closed, but positioning and global risk-off sentiment affecting the entire CEE region could push EUR/HUF higher, which would raise the risk to our NBH call
Hungarian yield curve
After a huge rally in rates in the first half of January, the market pressure eased and some bets on rate cuts were taken back. However, the curve continues to steepen with the 2s10s IRS within reach of zero, significantly outperforming CEE peers at the moment. However, if the NBH delivers a 100bp rate cut as we expect, the market will move back to where it was after the December inflation reading and comments from NBH officials. That's why we like getting rates at these levels at the short end of the curve.
Looking even better in our view are Hungarian Government Bonds (HGBs) which have also sold off and are not trading far off the IRS curve. So with a very favourable inflation profile for the coming months and the central bank cutting rates, we see good value here once again. Additionally, the supply side of HGBs looks good, with a significant drop in net supply in particular, from last year.
