An exciting Monetary Council meeting is due tomorrow

HUNGARY - In Brief 23 Sep 2019 by Istvan Racz

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On Tuesday, September 24, the Monetary Council is scheduled to come together for a rate-setting meeting and to discuss the next quarterly inflation report. On this occasion, no-one expects any change in interest rates, and indeed, analysts seem to agree that no interest rate measure is likely at any time in the foreseeable future or at least in the rest of 2019. The remaining questions are the setting of the Q4 liquidity target, any potential measure regarding the Bank's HUF300bn program to buy domestic corporate bonds and the wording of the communiqué. A considerable part of analysts expects a minor shift on the latter subjects towards the loosening of policy, given the room created for that by the recent rate cuts by the FED and the ECB.We agree with the broad consensus on interest rates, but we differ on the rest. The crucial point, in our view, is the exchange rate. As we are writing this note, the forint is trading around 334.65 against the euro, which is a new historic low point for the currency. At this level, EURHUF has risen by 3.4% from the average EURHUF rate for H2 2018. The latter means that the forint's depreciation is now pushing inflation rather than containing it, as it happened in H1 this year, when the yoy HUF depreciation was 2.1%, as estimated from semiannual averages. All this at a time when the price of crude oil has risen again, domestic demand is growing markedly faster than GDP, and from November, the yoy headline rate of CPI-inflation will be boosted by a fuel-price-related base effect anyway. Relaxing policy, even if just symbolically, could simply send the headline rate up to the northern side of 4% yoy, the upper end of the MNB's tolerance...