Focus FX Currency Forecast

10 Februarie 2011

RAIFFEISEN BANK S.A.

 

EUR/HUF

EUR/HUF: 268.0 - 275 (March)

After a long period of controversial communication that provoked market uncertainty, at a press conference on Saturday (5 February) PM Orbán made some important statements on monetary policy and related issues. The topic is fairly important in light of the open conflicts between the central bank and the government characterising the past 9 months as well as the upcoming personnel changes in the monetary council in March (four of the council members' 6-year terms will expire at the end of February, and the new members will be nominated the Parliament's Economic Committee, controlled by government politicians). PM Orbán claimed that one should not expect any radical, swift changes in monetary policy after the changes in the council. Theoretically, the four new government-nominated members would be able to reverse the recent interest rate hikes. We do not know yet who the 4 new monetary council members will be. Nevertheless, PM Orbán's comments do not point in the direction that the new members would necessarily arrive with the government's mandate to cut the interest rate immediately. In our view, the "old" monetary council will decide to keep rates unchanged in its last rate-setting meeting on 21 February and we expect that the "new" monetary council will keep rates unchanged in the upcoming period. There has also been some speculation in the media that the government wants to raise the inflation target from currently 3% to 3.5% in order to alleviate the need for rate cuts once the new  monetary council members are appointed. PM Orbán said that the government has no such intention. These are clear words. Such a move would have been rather silly anyway in our view, but it is reassur ing to hear it officially. The PM’s inclination to fight against inflation should generally be taken positively.

Moreover, fears that the government is about to exert its will directly over monetary policy should decrease. We should rather witness from the side of the government an effort to cut the mounting confidence deficit towards the current monetary policy. Once the new government has nominated the council members and put them in place, the current government-central bank conflict should quiet down as the battlefield will be located within the monetary council and its political dimension will transform into a professional one. Accordingly, we have changed our interest rate forecast and expect the key interest rate to remain unchanged at 6% over the next 6 months. For EUR/HUF we stick to our assumption of 275 as it will take longer to regain investor support while on the other side we do not expect any stronger surprises from the austerity package in February or the changes in the monetary council.

Trading Ideas

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