Goldman Says Oil Not Enough to Return Hungary to Rate-Cut Path

  • Effect limited for cutting rates from current levels: BofA
  • Rate-cut bets deepen on stimulus outlook, crude oil slump

It will take more than oil-price shocks and reinvigorated stimulus efforts in Asia and Europe to convince Hungary’s central bank to resume an easing cycle, according to the nation’s top rate forecasters.

Goldman Sachs Group Inc. and Bank of America Corp. said the nation’s policy makers will probably hold fast to a vow to keep borrowing costs unchanged, defying market expectations for lower rates to thwart deflationary pressures.

Hungary’s economy, they argue, is improving enough to keep inflation accelerating without a further reduction in benchmark interest rates from the a record-low 1.35 percent. The bond market has a different view, with forward-rate agreements showing bets for the deepest rate cuts since April as oil prices near 12-year lows push down energy costs less than a year after the country emerged from deflation.

“The oil price shock should prove transitory, especially against solid domestic demand,” said Magdalena Polan, a Goldman Sachs economist in London. “The threshold to outright rate cuts is still high.” Goldman Sachs is Hungary’s second most-accurate rate forecaster, according to data compiled by Bloomberg.

After leaving the benchmark rate unchanged for a sixth month last week, the central bank said it planned to maintain that policy for the entire forecast horizon of up to two years and that it would use other measures to ease policy if needed. Those steps could include fine-tuning rates on overnight loans and deposits as well as boosting interest-rates swaps to increase demand for government debt and help cut yields.

“Our baseline sees policy rate steady given limited effect of reductions at this level and the preference to have a stable rate profile in the coming years,” said Mai Doan, an economist at Bank of America in London and the rate’s best predictor. "Banks may need to be incentivized in different ways to increase lending to businesses."

Boosting Bets

Forward-rate agreements signaled the biggest risks to this strategy include central bank stimulus measures. Contracts slid in January, predicting as much as 18 basis points in cuts this year, after the European Central Bank signaled its may boost bond-buying and the Bank of Japan imposed negative rates for the first time.

Another pressure point is the forint, which has gained 1.3 percent this year against the euro, the best performance among emerging markets. A stronger forint reduces the cost of imports, cutting inflationary pressures.

Still forecasts show inflation will accelerate 2.1 percent this year after shrinking 0.1 percent in 2015, according to the median estimate of economists surveyed by Bloomberg.

"We don’t expect the central bank to lower rates further," Goldman’s Polan said on Tuesday. "Cutting rates by some 20 basis points would not ease monetary conditions much at all, and would not have a very positive impact on growth or inflation in the medium term."

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