At current exchange rate levels, the boost to export competiveness outweighs negative balance sheet effects stemming from the large net open FX position of the economy, they said.

However, “the authorities acknowledge that beyond a certain point, negative balance sheet effects would begin to dominate.” Among the key reasons why the NBH is likely to be tolerant of a somewhat weaker forint is the widened eligibility and rising participation in the exchange rate cap scheme, which means that a large share of FX borrowers is insulated from forint depreciation.

“We remain of the view that the [central bank’s rate setters] are likely to lower the policy rate to 2.50 % ... provided forint weakness does not become excessive or too volatile.”

The fact that the bank’s monetary council has surprised markets with slightly larger than expected rate cuts in recent meetings “reinforces our impression that the NBH is likely to be comfortable with a further gradual move higher in EUR/HUF provided the depreciation occurs in a smooth and controlled fashion,” JP Morgan’s analysts said.

The forint traded at levels around 313 to the euro on Monday.

Source www.hungarymatters.hu

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