NBH Review: Too early to change hawkish forward guidance
The National Bank of Hungary left rates unchanged with no surprises. Although the market was expecting at least some shift in forward guidance after the dovish data in recent weeks, the governor reiterated hawkish guidance, indicating a long path to rate cuts. High inflation expectations and global uncertainties are now in the central bank's crosshairs
| 6.50% |
Key interest rateNo change expected |
Focus on elevated inflation expectations
As expected, the National Bank of Hungary left interest rates unchanged today at 6.50%. The main focus was on forward guidance which remained hawkish and essentially unchanged from the March meeting, despite some dovish shift in the Hungarian and global story. Governor Mihaly Varga reiterated at the start of the press conference that rates may remain unchanged for an extended period, while the risks to growth and inflation have increased. Judging by the Governor's tone, it appears that inflation expectations have become the NBH's primary concern, with a decline in this area now set as the main objective. This follows a spike earlier in the year, driven by unexpected inflationary pressures in January and February.
A considerable part of the speech was also devoted to global uncertainties stemming from the US trade wars and financial market sensitivities in emerging markets, including Hungary. The Governor mentioned that maintaining financial stability is key to achieving price stability, suggesting that the level of EUR/HUF is still one of the main indicators for the central bank.
No rate cut this year despite dovish risk rising
In the absence of any changes in the NBH's forward guidance, our view remains unchanged. As a baseline, we expect the central bank to leave rates unchanged for the whole of this year, and we may see the first rate cut only at the beginning of next year. Inflation did show a downside surprise in March compared to market expectations, but this was in line with the NBH forecast. April inflation should show another decline next week, probably below 4.0%, but we expect a rebound for subsequent months.
Admittedly, the government measures point to some downside risk, and at the same time, the government is discussing extending the current measures, which could again push the inflation profile down a bit. However, we believe that the inflation problem has not been solved and headline inflation will hold at 4% in the second half of the year, while core inflation will remain even higher at closer to 5%. Still, the risks at the moment are further downside surprises in inflation due to hard-to-quantify government measures and downside surprises in economic growth driven by global developments, which would increase the chances of a rate cut at the end of this year.
Our market view
It is evident from the market reaction that the market had built up some expectations of a dovish NBH shift based on the weaker data in recent weeks. Although the rates market has seen some rebound across the IRS curve, FX remains essentially unchanged following the end of the NBH press conference. This confirms our assumption that EUR/HUF is more of a global play than a local story at the moment. Although there has been some loosening since the US ‘Liberation Day’, the DAX index is still our best leading indicator for EUR/HUF, while local factors remain marginal in our models. This makes EUR/HUF harder to predict in the current situation. But we believe that further downside is limited, and the current lower EUR/HUF levels are rather temporary, with a return to 410 likely in the second half of the year. In the short term, however, a significant unwind of US tariff policy or significant progress in the Ukraine-Russia peace deal is a positive risk for the HUF.
In the rates space, the market has outpriced a few basis points of easing across the curve, but the dovish core markets are holding the HUF curve down. In a one-year horizon, we see less than three rate cuts priced in and roughly 150bp throughout the cycle, with a terminal rate of around 5.00 if we assume BUBOR above the NBH key rate at the end of the cycle.
Thus, in our view, at the short end of the curve, the market is overpricing the dovish economic data in the weeks ahead, and although inflation data next week will support this narrative, the story may turn against market pricing in the months ahead. On the other hand, the belly and long end of the curve still look cheap despite the significant rally in recent weeks. At the same time, given global uncertainty, risk-reward has fallen significantly here in our view, and we wouldn't want to chase the rally.
Download
Download articleThis publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more