INSTANT VIEW - Hungary's cenbank stuns by 300-bp rate hike (5)
Wednesday, October 22, 2008 11:30:00 AM
(Adds a comment by Danske Bank, Dresdner, RBC on page3)
The National Bank of Hungary (NBH) has on Wednesday raised its benchmark rate by 300 basis points to 11.50%.
According to a statement released by the central bank, Hungary's two-week deposit rate is 11.50% as of 11:00 CET 22 October.
Nicholas Kennedy, 4Cast, London
“The decision to hike rates 300bps clearly a surprise and one that is likely to take a few days for the market to fully digest with EM as a whole under pressure and the local bond market not functioning."
“After holding rates on Monday the move is clearly an effort to shore up the beleaguered forint which traded close to 283.00 this morning and really confirms in our eyes that the NBH is still primarily an FX targetor."
“Repeated talk about a speculative attack over the long weekend clearly another motivational factor and seems to suggest that the market rather than the bank itself is in the policy driving seat."
“Given global problems it's unlikely that this move alone with spark a significant improvement in local fortunes though clearly will help curb speculative interest to bet against Hungary and avert something more disorderly from happening."
“More interesting could be the broader implications this has, certainly throws down the gauntlet for other EM central banks with hopes that rate hikes can be avoided clearly blown out of the water."
Zoltán Török, Raiffeisen Bank, Budapest
“The move came as EUR/HUF continued its depreciation and investors sentiment continued to worsen."
“EUR/HUF reacted by appreciating from 280 to 272 and currently holds around 275. Even though we think the move was positive and a strong sign, we still expect forint volatility and weakness to persist in the coming weeks."
Stuart Bennett, Calyon, London
“The 300bp hike by the NBH was a surprise, especially after Monday's rate setting meeting ended in no change in policy and with the Bank not even discussing a hike, or a cut. But difficult times call for extraordinary measures."
“The HUF has weakened around 17% since the end of September as the market has focused on Hungary as vulnerable to the banking sector crisis given its large exposure to FX denominated loans."
“The government has attempted to talk up the market, whilst providing liquidity support, alas to no avail and with only EUR16bn worth of reserves intervening in the FX market was obviously deemed to be unlikely to succeed."
“Plus one wonders if the IMF, which said it would offer "advice" to Hungary had a hand in the decision. The short-term reaction boosted the HUF, but only transiently, the medium term risk is that this appears to be panic on the part of policymakers and the market now moves even more negatively against Hungarian markets."
Dániel Bebesy, Budapest Fund Management, Budapest
“A radical move was necessary. The 300-bp hike to 11.50% is clearly a reaction to the drastic forint depreciation of the past days. The central bank is probably trying to prevent EUR/HUF from stabilising at the current weaker levels."
“Hungary has been put into the spotlight of global markets and foreign media has been reporting on the country's economic crisis, so a radical move was required. The NBH has presumably resorted to FX market intervention in the past days, which apparently did not have the hoped impact."
“In the current situation, however, we cannot be certain about the results of the rate hike, since global liquidity has dried up completely and a higher interest rate does not automatically boost demand for forint assets."
Gyula Tóth, Martin Blum, UniCredit, Vienna
“Hungary is effectively following Romania and increasing rates to protect its currency (though Romania has not officially hiked). We expect focus to shift to other Central Banks in the region where currencies have recently significantly depreciated (loosening monetary conditions). The next in the row is the Central Bank of Turkey, which is holding a normal rate meeting this afternoon."
“We recommended paying 2y TRY ccs in this morning's EEMEA Daily given monetary conditions have now loosened significantly and rates have only moved moderately higher on the weaker TRY. In short, although the Turkish growth outlook is weak the pace of monetary conditions loosening is too fast, meaning inflation risks should move back onto the CBT's agenda. Today's NBH hike provides an additional reason to pay TRY ccs from a timing perspective."
“Given the problems in the HGB market we did not think that a rate hike would be the NBH's preferred option without also initiating other measures to make the hike effective."
“Accordingly we suspect that the IMF deal is very close to being finalized (this was hinted by NBH Deputy Governor Karvalits yesterday), whilst potentially the NBH could intervene (i.e. it only makes sense to intervene if you hike rates also)."
“The fact remains, however, that the m-t growth outlook is very weak, whilst policymakers and the IMF are likely only trying to slow EUR/HUF upside as opposed to drawing a line in the sand (especially given limited FX reserves and damage which significant further hikes would do to government sovereign creditworthiness)."
“We target 274 to re-initiate EUR/HUF longs, with possible FX intervention potentially opening up this level."
Gergely Suppan, Takarékbank, Budapest
“In order to calm market tensions NBH hiked base rate by 300bps to 11.50%. The purpose of the central bank may prevent forint from short sellings. Given that a rate hike seems not effective in a risk aversion environment we do not see a persist turn-around of forint exchange rate."
“Developments on Hungarian markets are likely to continue to depend on global sentiment. The rate hike could slow forint depreciation if other emerging currencies continue falling and in a case of stabilisation of global markets forint could recover markedly."
“However, we believe that only further fiscal steps -spending cuts - could ease the vulnerability of Hungarian economy and forint."
Lars Christensen, Danske Bank, Copenhagen
“The hike is an emergency measure. While the forint has strengthened by more than 1.5% on the back of the hike, this is not that much taking into account the size of the hike."
“The hike has to be seen in the light of the serious pressure on the forint in recent weeks. While this move might give some protection to the forint, we doubt the effect will be long-lasting."
“The markets are very likely to test how far the MNB is willing to go to defend the currency, and it is notable that shortly after the hike and the initial strengthening of the forint the currency started to weaken once again - a clear indication that the markets do not expect the hike to have a long-lasting impact on the forint."
“Further, the hike did not have any noticeable impact on the other CEE currencies. Normally a surprise hike would have strengthened not only the forint but also, for example, the Polish zloty and the Romanian leu."
“Will other countries in the region follow suit and hike rates to defend their currencies? This is clearly a possibility, but we would stress that rate hikes not only have a negative impact on growth, but also on the funding costs for banks in the region - which is of course a serious problem in the present situation with a credit crunch."
“We do, however, see an increased likelihood of the Turkish central bank (TCMB) following the lead of NBH and hiking its key policy rate by as much as 100bp at today's regular monetary policy meeting given the significant weakening of the Turkish lira over the past couple of days."
“The situation in CEE is developing in an explosive way today, and money market rates have spiked very dramatically everywhere in the region - in Romania, O/N rates are now apparently above 200%!"
“We still do not recommend being long in the forint - not even with interest rates at 11.50%."
Ivailo Vesselinov, Dresdner Kleinwort, London
“The move was clearly prompted by the latest bout of HUF depreciation, which had taken the currency this morning more than 16% weaker against the USD since the start of the month, touching a two-year low of 278.38 at one stage yesterday."
“We expect that the surprise timing of the rate hike will provide some immediate support to the HUF, but reiterate that the currency is ultimately set to remain under pressure due to current spiking risk aversion."
“As such, the authorities may yet discover that they need an outright deal with the IMF in order to shore up market confidence. Today's action from the NBH suggests to us that such a deal with the Fund is not likely to materialise any time soon, which evidently forced the central bank to take emergency action."
Nigel Rendell, Royal Bank of Canada, London
“Hiking interest rates by 300bp in Hungary is not going to instil any confidence in the HUF market or provide anything but a knee-jerk reaction for the currency."
“The corporate and household sectors will come under intense pressure as a result of this move. Higher interest rates spell further bad news for the banking system, through rising non-performing loans."
“It also adds to the Government's fiscal woes, prompting a downward spiral of economic slowdown and more budget tightening. The HUF has been under pressure because of Hungary's dependency on foreign capital and scarcity of funds. In these markets the level of interest rates is virtually irrelevant."
“Given the external backdrop we see EUR/HUF continuing to move higher, with 300 now within sight. The only question is timing."