Two Rate Decisions to Dominate EMEA Agenda This Week

Two rate decisions – both on Tuesday – will dominate the EMEA agenda next week. Most interest will undoubtedly be on the Hungarian rate decision after the recent spike in volatility in the Hungarian markets on the back of the Hungarian government’s decision to pass a new central bank law. The law has been heavily criticized by the European Commission as, according to the EU, it is in breach of EU rules and limits the independence of the central bank.

This week, the Commission said it has initiated legal action against the Hungarian government regarding the central bank law. There will likely be more focus on these issues rather than on actual monetary issues at the press conference following next week’s rate decision. We expect Hungarian central bank governor Simor to continue to fight for and defend the independence of the Hungarian central bank (MNB). However, he will also be cautious about upsetting the  markets. So far, the MNB has shown considerably more calm than the Hungarian government, in our view.

The MNB has hiked its key policy by a total of 100bp over the last two Monetary Council meetings, despite the complete lack of growth momentum in the Hungarian economy. However, inflation also remains above the MNB’s 3%-inflation target and there is no doubt that the recent sharp sell-off in the forint is a key driver for the MNB’s hawkishness. With the MNB’s independence under attack, political uncertainty remains elevated. Therefore, we remain in line with the consensus expectation expect a 50bp rate hike to 7.50%.

The rate decision should be somewhat less interesting than the Hungarian rate decision. That said, over the past year the Turkish central bank’s communication and policy actions have been somewhat erratic so every Turkish rate decision is drawing a lot of attention and uncertainty about the outcome of the decision is much higher than it needed to be.

Turkish inflationary readings remain volatile and elevated, with the December headline reading hitting a 2011 high of 10.45% y/y, up from 9.48% y/y a month previously and averaging around 6.5% for 2011. Our latest forecasts see CPI averaging 8.4% in 2012E, but the risks are skewed for higher readings despite the central bank’s determined, inflation hawkish stance.

Since cutting policy rates at the interim rate setting meeting in August by 50bp to 5.75% to shore up against slowing growth and as a pre-emptive measure against the deteriorating external conditions, the TCMB has taken an almost 180 degree turn and adopted a rather hawkish stance in the face of accelerating inflation and the depreciation of the lira, which it regards as excessive. Following the last inflation report, the TCMB launched a lira supportive new policy approach that utilises a rate corridor of 5.75% to 12.5% on the o/n lending rates and effectively re-sets lending rates on a daily basis. However, in terms of the actual policy rates, we see no changes in either direction in the near term, as attention remains on the o/n lending rates and a host of other unorthodox measures. We therefore expect unchanged rates from TCMB at next week’s meeting. That is also the consensus expectation.

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