The National Bank of Hungary will decide on rates today, but the decision itself should be a non-event. However, forward guidance will be more important than ever. Over the last two weeks, there have been several headlines from the government about increasing the public deficit this year and next year to 5% of GDP. At the same time, there have been many spending and tax measures to support household consumption and the decision to extend the government's price measures, ING's FX analyst Chris Turner notes.

Hungary’s fiscal shift tests Central Bank tone

"Inflation is roughly in line with expectations and the path is favourable for the next few months. The fiscal picture has changed significantly. Therefore, it will be important to see whether this changes the tone of the NBH in any way. In the baseline, nothing other than a hawkish tone can be expected, just like the last few meetings. At the same time, we should see some effort to strengthen the hawkish tone regarding the rate of increase in the fiscal deficit (from 3.7% to 5.0% next year)."

"On the other hand, there is not much more the central bank can do here, and market pricing has already shifted in a hawkish direction. The market is pricing in 58bp of rate cuts over the two-year horizon, and the terminal rate is the highest since April. Therefore, overall, we see more risk on the dovish side given the hawkish market stance. Therefore, we see a case for more steepening of the curve in the current environment."

"FX should remain under control in our view. The new US 'financial shield' seems to have been taken seriously by the market, which is likely to keep any sell-off shallow, and the market will quickly fade any weakness in HUF. Therefore, we do not expect to go above 386 EUR/HUF anytime soon. At the same time, there is no more impetus to go further down for now, unless the NBH surprises with a more hawkish tone."