Last month the National Bank of Hungary (NBH), central Europe's most dovish central bank, flagged possible tightening at its March 24 meeting to rein in accelerating inflation, at a time when the forint was marking record lows against the euro.
Since then the picture has changed. The Federal Reserve on Tuesday unveiled its first emergency rate cut since the 2008 financial crisis in response to the coronavirus, while central banks from Bahrain to Canada and Australia have made similar moves.
More stimulus is likely from most big central banks. In central Europe, investors and firms are weighing up the toll that supply-chain disruptions and weaker demand could take on growth.
The forint <EURHUF=D2> firmed to 335-336 after the Fed cut weakened the dollar, and investors began to unwind carry trades. That could allow the NBH to stay on the sidelines.
"All central banks are off the hook now in terms of pressure from the market to turn hawkish," said Tatha Ghose, a senior economist at Commerzbank.
Several analysts said the NBH was likely to keep its rates unchanged and reassess inflation and growth risks at its March meeting.
"The growth picture has deteriorated globally because of the coronavirus. Inflationary expectations have moderated and looser policy is expected from major central banks," said Gergely Forian-Szabo at Amundi fund management in Budapest.
"So the NBH has won time again, due to a strengthening of downside inflation risks."
February inflation data due next week will be closely eyed, after the January headline reading hit a seven-year high of 4.7%.
While the base rate is expected to remain at 0.9%, KH Bank analyst David Nemeth said the NBH could still make a symbolic small hike this month in the overnight deposit rate, which is still at minus 0.05%.
Central Europe inflation: https://fingfx.thomsonreuters.com/gfx/mkt/13/2859/2824/CEE%20inflation%20rises.png
GROWTH RISKS WORSEN
The NBH said in an emailed reply to Reuters that it did not wish to make any comments on policy, and that its February statement was valid.
Last month the bank said the increase in inflation at the start of 2020 mainly reflected changes in fuel and food prices, and pledged to use every tool at its disposal to act "if a sustained change in the outlook for inflation warrants it".
The bank has been run by Gyorgy Matolcsy, an ally of Prime Minister Viktor Orban, since 2013, and has strongly supported the government's policies by cutting rates to the lowest in the region.
The government cut its growth projection for this year to 3.5% from 4%, partly due to coronavirus risks.
On Wednesday the head of the Confederation of Hungarian Employers and Industrialists said Hungarian firms faced component shortages because of the coronavirus's impact on supply chains, which could aggravate a slowdown that had already begun.
Capital Economics reduced its growth forecasts for Central Europe on Wednesday, cutting Hungary to 3.3%.
"Above-target inflation means that the policy response in Central Europe is likely to be small," it said in a note.
The Fed's rate cut and expectations that the ECB will ease policy next week have prompted the group to pencil in interest rate cuts in Poland and the Czech Republic. Meanwhile, tightening measures in Hungary may be less likely.
"The NBH might now be less inclined to hike the overnight deposit rate this month than we had previously thought," they said.
CEE interest rates: https://fingfx.thomsonreuters.com/gfx/mkt/13/2860/2825/CEE%20interest%20rates.png
By Krisztina Than