Merrill Lynch Downbeat On Hungary

Hungary’s mid-term economic stability outlook was termed “consistently gloomy” and its budget deficit “terrible” by London-based financial powerhouse Merrill Lynch in a European emerging markets report published on Monday.

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The latest issue of Merrill Lynch’s monthly report explained its gloomy outlook on Hungary by a chronic slip of the central budget deficit, a hefty current account deficit and the country’s mounting external debt.

In the meantime, slowing economic growth and falling core inflation is forcing the National Bank of Hungary (MNB) to keep cutting its central rate, the London-based bank said. While MNB this year cut its central deposit rate 2.25 percentage points until May, the rate is still too high, 4.5 percentage point higher than the rate of core inflation, offering the biggest yield gain in the entire Central East European region, Merrill Lynch added.

However, the expected falling yield will increase the vulnerability of the Hungarian forint, and the central bank, which primarily follows currency rate fluctuations, could be forced to stop cutting its prime rate and might even go for a rate hike before the end of the year. Merrill Lynch forecasts that the MNB will continue with rate cuts in the short run, but rate hikes are quite probable in the second half of the year.

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