Forint mixed on interbank market

The Hungarian currency lost some more to the euro while the common currency continued to recover against the dollar ahead of Wednesday's Fed guidance expected to push back a rate hike penciled in for the second half of this year. This still helped the forint against the dollar and the franc. At the week-end, the euro fell to almost 12-year lows following ECB's quantitative easing announcement and the victory of the main anti-bailout party in elections in Greece.

The National Bank of Hungary (MNB) left its policy rate and guidance unchanged on Tuesday, but a new hint in its statement at "a shift towards the alternative scenario implying looser monetary policy published in the December 2014 Inflation Report," based on data available since the latest policy decision, recharged market expectations that the central bank could restart easing in the foreseeable future. However, analysts disagree on the nature of the expected easing in Hungary given the multitude of factors the MNB should ponder.

The MNB's concerns are deflation and the possible appreciation of the forint in light of the ECB's quantitative easing program, analysts say. Meanwhile, core inflation expected to grow after a dip in December, the need to avoid sinking Hungarian sovereigns' risk premium too deep, and easing peer pressure from Poland could also be factors in the central bank's balancing act. Fresh data out Tuesday on accelerating Polish retail trade growth and declining unemployment distanced a bit the prospect of a Polish rate cut in the near future.

RBS expects monetary policy easing to remain on the cards in Hungary as the strength of government bond market is a positive signal, parallel to declining fuel prices. RBS pencils in a 30-50 bp of cuts in the first half this year, even if the forint stays under pressure, as the conversion of household forex loans into forint debt leaves the central bank with a wider room to manoeuvre.

Commerzbank said in a note on Tuesday that it saw "a likelihood of 40 bps lower rates from here by mid-year, with the first of the easing steps arriving during Q1.Our view is based on the extended low-inflation or deflation outlook around the CEE..., expected slower growth in Hungary this year and ECB's recent quantitative easing announcements."

But "with a bias towards more easing, the (MNB) will have to decide whether more rate cuts could have a significant impact on the economy," UniCredit said in a note on Tuesday. "In our opinion, rate cuts are unlikely to boost lending or reduce government borrowing costs beyond one year. This is why alternative measures seem more likely," UniCredit said.

MNB governor György Matolcsy has flagged an expansion of the bank's cheap loans program for SMEs — the Funding for Growth Scheeme — to include big firms this year on Sunday.

In the regular auction of three-month Treasury bills on Tuesday yields kept falling while the issue was restricted to the amount planned amid thinning bid to cover ratio.

The forint traded at 273.30 to the dollar, up from 276.62 late Monday. On Tuesday, it moved between 272.96, a five-day high, and 277.88 after reaching its weakest point, at 279.57 on Sunday, since its latest all-time low of 280.33 on January 15.

It was quoted at 303.08 to the Swiss franc, up from 306.20 late Monday. Its range on Tuesday was 300.91, an eleven-day high, to 309.60. It plunged to an all-time low at 378.49 on January 15.