A mixed bag this week on emerging policy and one that shows the growing divergence between dovish central Europe and an increasingly hawkish (with some exceptions) Latin America.
Hungary cut rates this week by 25 basis points, a move that Morgan Stanley described as striking “while the iron is hot”, or cutting interest rates while investor appetite is still strong for emerging markets. The current backdrop is keeping the cash flowing even into riskier emerging markets of which Hungary is undeniably one. (On that theme, Budapest also on Wednesday announced plans for a Eurobond to take advantage of the strong appetite for high-risk assets, but that’s another story).
So despite 6 percent inflation, most analysts had predicted the rate cut to 6 percent. With the central bank board dominated by government appointees, the stage is now set for more easing as long as investors remain in a good mood. Rates have already fallen 100 basis points during the current cycle and interest rate swaps are pricing another 100 basis points in the first half of 2013. Morgan Stanley analysts write:
The bank’s modus operandi seems to be to take rates down as long as the risk environment allows them.
The bank’s dovish stance has pushed short-end Hungarian yields more than 150 basis points lower since June while the forint has shrugged off the cuts to gain more than 11 percent this year against the euro. But not everyone is buying. Benoit Anne, head of EM strategy at Societe Generale advises clients to buy euro whenever the forint rises: