First MNB sterilisation rate cut more likely in June than next Tuesday

HUNGARY - In Brief 19 May 2023 by Istvan Racz

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The forint has weakened somewhat over the last 24 hours, giving back from its impressive strength seen in recent weeks. Two reasons are widely mentioned: USD strengthening against EUR, and the upcoming Monetary Council meeting early next week (Tuesday, May 23), when many on the market think the MNB might decide to carry out its first sterilisation rate cut on decreasing inflation. But will the MNB indeed cut the sterilisation rate? Well, they could do so, but the regular monthly rate-setting meeting in late June is a more likely time for that step to happen in our view, because of the following reasons: - Deciding on a turn in the interest rate cycle is a big decision anyway. Hence, it appears to deserve waiting for the Q2 inflation report, so that the Council can make a really well-informed decision. And that report is set to be discussed at the late-June meeting.- So far, CPI-inflation fell only in a single month. The marginal decreases recorded in February and March were purely products of statistical methodology. The sterilisation rate is still deeply negative in real terms. One could say no, no, you need to look at prospective inflation, but that can be the MNB's prospect at best, most probably not reflecting the momentary view of the public. Jumping on the first piece of favourable data by a material loosening step could appear too self-confident, suggesting that rapid disinflation is already in the Bank's pocket, which is not true and has not been the MNB's publicly known message so far.- Q1 GDP data was relatively good-looking, especially compared to the monthly flow of background indicators coming out of KSH. It represents no reason for an early rate cut. In f...