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MNB Might Deliver Larger Rate Cut On Deflation Fears

ByDanske Markets
Published 11/22/2013, 03:55 AM
Updated 05/14/2017, 06:45 AM

The rate decision in Hungary will be the key event in the EMEA region next week. Even though consensus expects another baby-step rate cut of 20bp, we think there is a chance that the Hungarian National Bank (MNB) could be more aggressive and deliver a 40bp cut, bringing the key policy rate down to 3%. The main reason why we think a larger rate cut is justified is sharply falling inflation, currently well below the official target of 3%.

Our inflation model actually indicates that the risk of deflation is high and we could see this early next year. Therefore, we think that the Hungarian central bank has room for further easing and that it should be more aggressive in rate cutting. We therefore expect it to take a more aggressive step next week and cut by 40bp to 3%. If the MNB surprises by making a larger-than-expected rate cut, the market reaction could be quite significant. We therefore recommend to be positioned for a weaker HUF head of the MPC meeting.

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