One year after we had the discussions about the HUF band on AAM, the Monetary Council has (finally) decided to scrap the band.
At this point it's hard to say if this is gonna be good or bad news for the people with property in Hungary.
The Monetary Council of Hungary, in accordance with the government, has abolished the forint's fluctuation band against the euro as of 26 February, and decided to switch to a floating exchange rate regime.
“The National Bank of Hungary (NBH) considers the establishment and long-term sustaining of price stability its foremost and most important objective. In an inflation targeting system, considering the wide scope of macroeconomic and money market processes, the central bank reacts to the combined effect of these. Restricting exchange rate fluctuations in an inflation targeting system do not contribute to anchoring long-term inflation expectations."
“The abolishment of the exchange rate band is an important step towards the adoption of the euro in Hungary. A floating exchange rate regime creates more favourable conditions for the central bank to achieve its inflation target, and via this to meet the nominal Maastricht criteria and to enter the ERM-2."
“Given the openness of the Hungarian economy, the exchange rate will continue to play an important role in forming inflationary processes. If other developments in the economy fail to counterbalance, a sustained and considerable change in the nominal exchange rate will be reflected in the central bank's inflation prognosis and as such will exert an impact on monetary policy."
REACTIONS
Gábor Ambrus, 4Cast, London
“Defying our expectations, the Hungarian central bank has left rates unchanged at 7.50% but at the same time announced that it scrapped the trading band of the forint, a decision taken jointly with the government."
“CPI forecast is upped by a significant margin both for and 2008 and 2009. EUR/HUF reacted with a significant three figure dip."
2CPI report will offer a considerable amount of food for thought and market will now be eagerly awaiting what Governor Simor and the MPC will have to say."
“There will no doubt be some credibility issues to be addressed and we still expect to MPC to keep a hawkish bias and we still see the outlook biased to hikes."
Mariann Trippon, CIB Bank, Budapest
“The main intention of the central bank was to stabilize the market and leaving the base rate on hold and at the same time abandoning the band could do the job."
“It seems that the government and the central bank reached a compromise. Moving to free float was already in the air, but the government always rejected the idea, however they might have felt that the recent weakening of the HUF makes the decision less risky."
“Volatility is likely to persist in the upcoming period until the market finds a new equilibrium level."
Nigel Rendell, Royal Bank of Canada, London
“This was a clever move by the NBH, but whether this has a lasting impact on boosting the HUF is debatable. Hungary needs a tighter policy in order to cap inflationary pressures but higher interest rates would further hit the depressed domestic economy."
“By scraping the HUF band the central bank hopes that an appreciating currency will do the trick. However, the risk remains, particularly against an uncertain global environment, that the HUF rally runs out of steam."
“This would leave the NBH in a very difficult situation, particularly if there are disappointments on the inflation side."
Gyula Tóth, Martin Blum, UniCredit, Vienna
“We now see risk/reward in favour of receiving 5y rates (target 7%) and moving to long HGB duration, but would be flat HUF."
“Our rationale for positioning for lower rates:
(1) scrapping of EUR/HUF band means a greater degree of monetary conditions tightening could (though need not necessarily) now occur through a firmer HUF (+ if there's no HUF band the NBH doesn't need to hike to protect it).
(2) Politically, the govt is obviously trying to avoid hikes by finally giving the greenlight to scrapping the band.
(3) Growth remains soft.
N-t constructive for HUF (meaning we move back to neutral from neg and close EUR/HUF longs and move to M/W HUF). The big caveat, however, is that the soft growth outlook and lack of NBH hikes is not overly HUF positive in the m-t (despite an improvement in twin deficit). This means we continue to see better risk/reward on rates than FX."
Stuart Bennett, Calyon, London
“First impression is that getting rid of the HUF bands should not be good for the HUF. The NBH said that bands not in line with anchoring inflation expectations at the same time as increasing its 2008 and 2009 CPI forecasts."
“Hence suggests that Bank would like the HUF, rather than interest rate hikes, to do the hard work in fighting inflation, but with activity weak and perhaps the prospect of rate hikes diminishing there is little obvious reason to be bullish HUF solely because what were wide trading bands to start off with have been abolished"
“Plus, on the rate outlook, notice that the NBH is assuming wage growth of 7.8% in 2008 - this is still a little above its comfort range, but probably not enough to force it to hike rates aggressively given the econ backdrop."
Raffaella Tenconi, Dresdner Kleinwort, London
“The decision to abandon the HUF band today is surprising, but extremely positive since it is evidence that PM Gyurcsany maintains a strong leadership and is committed to advance deep structural reforms."
“By abandoning the band, the central bank will have full scope to influence inflation and the exchange rate. This is a major step forward since one of the main weaknesses of Hungary has been continuing elevated inflation expectations."
“At the same time, the abandonment of the band will put more pressure on the central bank and the government to deliver coherent and transparent policies in order to avoid disorderly corrections in Hungarian assets."
“The new Inflation Report revised the inflation projections in line with our view, strongly signalling that the MPC will tighten monetary policy in the near term. Headline inflation (avg) is seen at 5.9% in 2008 (from 5% previously) and 3.6% in 2009 (from 3.0%). That is inflation will not converge to the 3% target until the end of 2009. Core inflation (avg) is expected at 5.2% in 2008 (from 4.6%) and 3.6% in 2009 (from 3.1%). The growth outlook was revised down to 2.0% in 2008 (from 2.4%) and 3.0% in 2009."
“These developments reinforce our view of a 50bps monetary tightening in the near term, with potential for more given the uncertain global environment."
György Barcza, K&H Bank, Budapest
“The Monetary Council's statement emphasised that it will not tolerate deterioration of inflation expectations (ie. high yields at the long-end) and that rate hike may come if needed."
“Governor Mr Simor said that rate decision was a close call as 25bp hike was also discussed."
“The band abolishment was decided before the rate decision, which means that all members took into account that."
“Overall, the message sounds quite hawkish and we maintain our call for a 50bp rate hike, but we consider splitting it to two 25bp steps for March and April."
“The message sounds hawkish, especially as Governor said that "Council's aim is to cut inflation to target in 2009". This means significant disinflation as both core and headline CPI are projected at 3.6% for average-2009 vs the 3% target, although projection is close to 3% for end-2009."
“The inflation report now has slower growth and higher inflation path, this year's average CPI forecast was raised to 5.9%, close to our 6% level. The EURHUF assumption is 256, so at current exchange rate, somewhat higher inflation path would be the result."
“How could the central bank convince the government about scrapping the band? MNB has been arguing for this move for almost a year and the government might face the dilemma between exchange rate band with higher rates (extra budget cost) or no band with probably lower rates over the medium-term."
“Government finally took the better option in our understanding and this means another good point for the central bank. Last year we wrote that central bank will need more good points to achieve low inflation goals and it has gained one more."
Eszter Gárgyán, Citibank, Budapest
“The upside shift in the inflation forecast suggests to us that the NBH needs to see a significantly stronger forint to meet the inflation target, and with the abandonment of the band significant forint appreciation is now possible, supporting disinflation. Therefore, we believe that the NBH will still need to raise rates in the coming months, but less aggressive moves may be sufficient to support the currency due to the strengthening of monetary policy credibility."
“Our view is that the abandonment of the band supports monetary policy credibility, thereby reducing the expected risk premium on forint assets. This suggests to us that the NBH will probably need to hike less aggressively in the coming months to support disinflation, though we still believe there is a chance for a rate hike at the next MPC meeting in March."
“The size of the hike is likely to depend on market movements. Our view is that the MPC is trying to act cautiously with gradual 25bp steps."
“Following and increased initial volatility, we expect the forint to strengthen, supported by a hawkish monetary policy stance. Our view is that the abandonment of the band is supportive for long yields and the forint, but this alone does not prevent rate hikes in the short term, since a significantly stronger forint (around 245 against the euro) would be needed to achieve the 3% inflation target in 2009."
“This argument is also supported by today's hawkish statement, which emphasises the risks to elevated inflation expectations, owing to the upcoming supply-side shocks to producers. The statement confirms that further monetary tightening may be needed if incoming data, such as wages and prices, do not support the moderation of inflation expectations."
Lars Christensen, Danske Bank, Copenhagen
“The NBH also announced that it has abandoned its FX fluctuation band. We have long expected that this would happen sooner or later, so in that sense it is not a major surprise."
“Even though the NBH today left its key rate unchanged, the Hungarian forint rallied on the back of the decision."
“This clearly must be seen in the light of what is, in our opinion, a wise decision to finally get rid of the FX fluctuation band. The market reaction therefore is justified, but it should also be said that the forint spot rate was nowhere near the band - either at the weak or at the strong end of the band. The decision to scrap the fluctuation band was taken by the NBH with the consent of the Hungarian government which could have vetoed it."
“The decision ends years of an inconsistent monetary regime of dual targets - both FX and inflation - that the NBH has never been happy about. This is clearly a wise and positive decision."
2Even though the decision to abandon the FX fluctuation band is positive it should, in our view, not have a long-lasting positive impact on the forint and despite the favourable market reaction to the decision, we do not expect the rally in the forint to continue and we maintain the view that the risk of a large negative correction in the forint has increased on the back of the worsening of the global credit conditions. Rates and yields today fell roughly 20-25 bp at the front end of the curve."
“Today the NBH also published its quarterly inflation report. Not surprisingly, the NBH adjusted up its inflation forecast to 5.9% for 2008 vs an earlier 5.0%. This is not surprising given the recent weakness in the forint, higher oil prices and higher food prices. The NBH also adjusted down its GDP forecast for 2008 to 2.0% y/y from a previous 2.4% y/y."
“Going forward there is still a risk of rate hikes in Hungary - especially if the forint weakens significantly - but for now we believe that the NBH will maintain its wait-and-see approach."
Source: Portfolio.hu
At this point it's hard to say if this is gonna be good or bad news for the people with property in Hungary.
The Monetary Council of Hungary, in accordance with the government, has abolished the forint's fluctuation band against the euro as of 26 February, and decided to switch to a floating exchange rate regime.
“The National Bank of Hungary (NBH) considers the establishment and long-term sustaining of price stability its foremost and most important objective. In an inflation targeting system, considering the wide scope of macroeconomic and money market processes, the central bank reacts to the combined effect of these. Restricting exchange rate fluctuations in an inflation targeting system do not contribute to anchoring long-term inflation expectations."
“The abolishment of the exchange rate band is an important step towards the adoption of the euro in Hungary. A floating exchange rate regime creates more favourable conditions for the central bank to achieve its inflation target, and via this to meet the nominal Maastricht criteria and to enter the ERM-2."
“Given the openness of the Hungarian economy, the exchange rate will continue to play an important role in forming inflationary processes. If other developments in the economy fail to counterbalance, a sustained and considerable change in the nominal exchange rate will be reflected in the central bank's inflation prognosis and as such will exert an impact on monetary policy."
REACTIONS
Gábor Ambrus, 4Cast, London
“Defying our expectations, the Hungarian central bank has left rates unchanged at 7.50% but at the same time announced that it scrapped the trading band of the forint, a decision taken jointly with the government."
“CPI forecast is upped by a significant margin both for and 2008 and 2009. EUR/HUF reacted with a significant three figure dip."
2CPI report will offer a considerable amount of food for thought and market will now be eagerly awaiting what Governor Simor and the MPC will have to say."
“There will no doubt be some credibility issues to be addressed and we still expect to MPC to keep a hawkish bias and we still see the outlook biased to hikes."
Mariann Trippon, CIB Bank, Budapest
“The main intention of the central bank was to stabilize the market and leaving the base rate on hold and at the same time abandoning the band could do the job."
“It seems that the government and the central bank reached a compromise. Moving to free float was already in the air, but the government always rejected the idea, however they might have felt that the recent weakening of the HUF makes the decision less risky."
“Volatility is likely to persist in the upcoming period until the market finds a new equilibrium level."
Nigel Rendell, Royal Bank of Canada, London
“This was a clever move by the NBH, but whether this has a lasting impact on boosting the HUF is debatable. Hungary needs a tighter policy in order to cap inflationary pressures but higher interest rates would further hit the depressed domestic economy."
“By scraping the HUF band the central bank hopes that an appreciating currency will do the trick. However, the risk remains, particularly against an uncertain global environment, that the HUF rally runs out of steam."
“This would leave the NBH in a very difficult situation, particularly if there are disappointments on the inflation side."
Gyula Tóth, Martin Blum, UniCredit, Vienna
“We now see risk/reward in favour of receiving 5y rates (target 7%) and moving to long HGB duration, but would be flat HUF."
“Our rationale for positioning for lower rates:
(1) scrapping of EUR/HUF band means a greater degree of monetary conditions tightening could (though need not necessarily) now occur through a firmer HUF (+ if there's no HUF band the NBH doesn't need to hike to protect it).
(2) Politically, the govt is obviously trying to avoid hikes by finally giving the greenlight to scrapping the band.
(3) Growth remains soft.
N-t constructive for HUF (meaning we move back to neutral from neg and close EUR/HUF longs and move to M/W HUF). The big caveat, however, is that the soft growth outlook and lack of NBH hikes is not overly HUF positive in the m-t (despite an improvement in twin deficit). This means we continue to see better risk/reward on rates than FX."
Stuart Bennett, Calyon, London
“First impression is that getting rid of the HUF bands should not be good for the HUF. The NBH said that bands not in line with anchoring inflation expectations at the same time as increasing its 2008 and 2009 CPI forecasts."
“Hence suggests that Bank would like the HUF, rather than interest rate hikes, to do the hard work in fighting inflation, but with activity weak and perhaps the prospect of rate hikes diminishing there is little obvious reason to be bullish HUF solely because what were wide trading bands to start off with have been abolished"
“Plus, on the rate outlook, notice that the NBH is assuming wage growth of 7.8% in 2008 - this is still a little above its comfort range, but probably not enough to force it to hike rates aggressively given the econ backdrop."
Raffaella Tenconi, Dresdner Kleinwort, London
“The decision to abandon the HUF band today is surprising, but extremely positive since it is evidence that PM Gyurcsany maintains a strong leadership and is committed to advance deep structural reforms."
“By abandoning the band, the central bank will have full scope to influence inflation and the exchange rate. This is a major step forward since one of the main weaknesses of Hungary has been continuing elevated inflation expectations."
“At the same time, the abandonment of the band will put more pressure on the central bank and the government to deliver coherent and transparent policies in order to avoid disorderly corrections in Hungarian assets."
“The new Inflation Report revised the inflation projections in line with our view, strongly signalling that the MPC will tighten monetary policy in the near term. Headline inflation (avg) is seen at 5.9% in 2008 (from 5% previously) and 3.6% in 2009 (from 3.0%). That is inflation will not converge to the 3% target until the end of 2009. Core inflation (avg) is expected at 5.2% in 2008 (from 4.6%) and 3.6% in 2009 (from 3.1%). The growth outlook was revised down to 2.0% in 2008 (from 2.4%) and 3.0% in 2009."
“These developments reinforce our view of a 50bps monetary tightening in the near term, with potential for more given the uncertain global environment."
György Barcza, K&H Bank, Budapest
“The Monetary Council's statement emphasised that it will not tolerate deterioration of inflation expectations (ie. high yields at the long-end) and that rate hike may come if needed."
“Governor Mr Simor said that rate decision was a close call as 25bp hike was also discussed."
“The band abolishment was decided before the rate decision, which means that all members took into account that."
“Overall, the message sounds quite hawkish and we maintain our call for a 50bp rate hike, but we consider splitting it to two 25bp steps for March and April."
“The message sounds hawkish, especially as Governor said that "Council's aim is to cut inflation to target in 2009". This means significant disinflation as both core and headline CPI are projected at 3.6% for average-2009 vs the 3% target, although projection is close to 3% for end-2009."
“The inflation report now has slower growth and higher inflation path, this year's average CPI forecast was raised to 5.9%, close to our 6% level. The EURHUF assumption is 256, so at current exchange rate, somewhat higher inflation path would be the result."
“How could the central bank convince the government about scrapping the band? MNB has been arguing for this move for almost a year and the government might face the dilemma between exchange rate band with higher rates (extra budget cost) or no band with probably lower rates over the medium-term."
“Government finally took the better option in our understanding and this means another good point for the central bank. Last year we wrote that central bank will need more good points to achieve low inflation goals and it has gained one more."
Eszter Gárgyán, Citibank, Budapest
“The upside shift in the inflation forecast suggests to us that the NBH needs to see a significantly stronger forint to meet the inflation target, and with the abandonment of the band significant forint appreciation is now possible, supporting disinflation. Therefore, we believe that the NBH will still need to raise rates in the coming months, but less aggressive moves may be sufficient to support the currency due to the strengthening of monetary policy credibility."
“Our view is that the abandonment of the band supports monetary policy credibility, thereby reducing the expected risk premium on forint assets. This suggests to us that the NBH will probably need to hike less aggressively in the coming months to support disinflation, though we still believe there is a chance for a rate hike at the next MPC meeting in March."
“The size of the hike is likely to depend on market movements. Our view is that the MPC is trying to act cautiously with gradual 25bp steps."
“Following and increased initial volatility, we expect the forint to strengthen, supported by a hawkish monetary policy stance. Our view is that the abandonment of the band is supportive for long yields and the forint, but this alone does not prevent rate hikes in the short term, since a significantly stronger forint (around 245 against the euro) would be needed to achieve the 3% inflation target in 2009."
“This argument is also supported by today's hawkish statement, which emphasises the risks to elevated inflation expectations, owing to the upcoming supply-side shocks to producers. The statement confirms that further monetary tightening may be needed if incoming data, such as wages and prices, do not support the moderation of inflation expectations."
Lars Christensen, Danske Bank, Copenhagen
“The NBH also announced that it has abandoned its FX fluctuation band. We have long expected that this would happen sooner or later, so in that sense it is not a major surprise."
“Even though the NBH today left its key rate unchanged, the Hungarian forint rallied on the back of the decision."
“This clearly must be seen in the light of what is, in our opinion, a wise decision to finally get rid of the FX fluctuation band. The market reaction therefore is justified, but it should also be said that the forint spot rate was nowhere near the band - either at the weak or at the strong end of the band. The decision to scrap the fluctuation band was taken by the NBH with the consent of the Hungarian government which could have vetoed it."
“The decision ends years of an inconsistent monetary regime of dual targets - both FX and inflation - that the NBH has never been happy about. This is clearly a wise and positive decision."
2Even though the decision to abandon the FX fluctuation band is positive it should, in our view, not have a long-lasting positive impact on the forint and despite the favourable market reaction to the decision, we do not expect the rally in the forint to continue and we maintain the view that the risk of a large negative correction in the forint has increased on the back of the worsening of the global credit conditions. Rates and yields today fell roughly 20-25 bp at the front end of the curve."
“Today the NBH also published its quarterly inflation report. Not surprisingly, the NBH adjusted up its inflation forecast to 5.9% for 2008 vs an earlier 5.0%. This is not surprising given the recent weakness in the forint, higher oil prices and higher food prices. The NBH also adjusted down its GDP forecast for 2008 to 2.0% y/y from a previous 2.4% y/y."
“Going forward there is still a risk of rate hikes in Hungary - especially if the forint weakens significantly - but for now we believe that the NBH will maintain its wait-and-see approach."
Source: Portfolio.hu
