BNY’s Head of Markets Macro Strategy Bob Savage expects rate cuts from Bank of Israel and Hungarian National Bank as inflation softens and exchange rates remain elevated. The report notes that both ILS and HUF have been strong sources of tightening, with markets focused on whether easing cycles will be precautionary or more prolonged, given ample room to cut from high starting policy rates.

Israel and Hungary set for easing cycles

"In EMEA, Bank of Israel (BoI) and Hungarian National Bank (MNB) decisions this week are likely to yield cuts as central banks react to materially softer inflation and elevated exchange rate valuations. Pass-through is likely significant in both the Israeli and Hungarian economies, while strong fiscal impulse is also expected to soften, although still to elevated levels even by EM standards."

"Israel, BoI (February 23, Monday) – The BoI is expected to cut rates again to 3.75%, adding to the easing introduced in January’s surprise move. Inflation has struggled to register a positive sequential print over the past three months and is now expected to be anchored at below 2.0%."

"Domestic activity remains robust, but with USDILS struggling to rebound from multi-year lows, we doubt the BoI will take any chances, especially with minimal rate differentials between themselves and the Fed, which will restrict outflows, which traditionally help limit currency strength."

"Hungary, MNB (Tuesday, February 24) – The MNB is now expected to cut rates by 25bp to 6.25% after the surprise January inflation print, which pushed annualized inflation to the lowest levels in almost eight years."

"Nonetheless, the currency has also been a strong source of tightening, even though its performance has long since detached from rate differentials vs. the EUR. Markets will be highly attentive to the impending scale of the cycle as there remains ample room for significant cuts."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)