We expect the MNB to tighten further tomorrow

HUNGARY - In Brief 26 Jul 2021 by Istvan Racz

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Last week, we said in our quarterly forecast that we expect the MNB to tighten further at their July 27 rate-setting meeting, either by raising the base rate by another 15 bps to 1.05% or by announcing some material specifics on cutting back QE policies, or maybe both at the same time. Now that the forint is quite weak today, possibly reflecting some investor nervousness, a rate hike is even more likely than it seemed a week ago. Making a big step is not essential, in our view, what would be more important is a renewed demonstration of commitment to a tightening trend and to a front-loaded approach, which have been both promised by the MNB.Raising the base rate further is even more possible as finance minister Varga keeps emitting optimistic signals on GDP growth. Just this morning, he came forward with the Ministry's Weekly Economic Index on Facebook again, claiming that the index predicted 8.8% yoy real GDP growth between July 11-18, following 7.2% yoy in the previous week. Just as a reminder, the index predicted -2.6% yoy in Q1, against the -1.6% yoy actual, and it predicted 13.7% yoy GDP growth for Q2 (the preliminary actual is expected on August 17). In our new forecast, which expects 5% real GDP growth for 2021, the quarterly GDP growth forecasts are 12.1% yoy for Q2 and 4.7% yoy for Q3.Finally, a piece of fresh news from the risk side: From tomorrow, Russian tourists will be allowed to enter Hungary if vaccinated against Covid. Frankly, we find this rather risky, as Russia, and particularly the Moscow region, is currently highly infected with Covid, and being vaccinated is not equal to being fully protected against the infection, especially not in the case of th...