The MNB withdraws support for the forint as effective interest rate cut are about to materialize (Daily analysis 22.05.2023)

The Hungarian inflation backdrop improved noticeably in April. Both CPI and core rate retreated below the 25% mark as base effects started to take centre stage. Although the monthly pace of price growth remains elevated and services inflation will prove stubborn and sticky, the structure of underlying price pressures seems to improve finally. The ambitious plan of bringing down inflation to single-digit numbers by the end of the year is still viable. Consequently, the MNB has the room to push forward with monetary policy easing when it meets on Tuesday, as it was timidly initiated in April.

Last month the central bank opted to refrain from reshaping its interest rates corridor by slashing the O/N collateralized loan rate by 450 basis points to 20.5%. This time the Monetary Council is about to take more decisive steps and lower the overnight quick deposit rate by 100bp to 17%. This policy tool was launched back in October 2022 to halt a rapid freefall of the forint, which carried risks of further severe macroeconomic destabilization. Since then, and as the threat of a full-scale energy crisis in Europe followed by a deep downturn abated, the HUF, supported with an extremely high level of effective rates, started to rally and has become one of the top-performing currencies globally. The EUR/HUF pair plunged by over 15 pct to briefly trade below the 370 mark last Tuesday.

Therefore, the Monetary Council will probably remain unfazed by the most recent emerging markets' currencies decline, which in the case of the HUF, was exaggerated by the government's pledge to block any further aid to Ukraine. The MNB is to pursue a prudent easing cycle, which, all in all, should be perceived as an unwinding of emergency policy instruments introduced last autumn. The future steps will be data-dependent, and the bar for a pause resulting from the emergence of the risk to the market stability or deterioration of macroeconomic fundamentals. Nonetheless, the base central bank rate should be kept at 13 pct at least until Q4 2023. As for the forint, we stick to the view that the HUF rally has little room to run. Given rough relations with the EU and domestic vulnerabilities, we expect the currency to lose its appeal as the MNB takes a step back and the EUR/HUF rate to drift higher towards the 390 mark in the second half of 2023.