The Hungarian economy is unlikely to benefit from further monetary easing as the scale of the current easing cycle depends on how the interest rate can by cut without provoking a sell-off in the markets and a sharp fall in the already-strong forint, Capital Economics Emerging Markets Economist William Jackson said Wednesday.

Capital Economics forecasts that though the central bank might cut its policy rate to 4.75 percent over the coming months, as widely expected, is will hike it again later in view of Hungary's external vulnerabilities, and possibly bring to 5.5 percent by year-end.

The central bank needs to keep interest rates relatively high to attract foreign capital, with the country having a large external financing requirement on account of its heavy external debt burden, the firm noted.

Also, the high levels of foreign currency debt makes it unsustainable to allow the forint to depreciate, which is seen as an alternative to boost the economy, as it would pose a serious threat to financial stability.

Another risk that might prevent rates from being cut further is mounting concerns about the change at the helm of the National Bank of Hungary, after the term of current governor Andras Simor expires in March.

The economist noted that the appointment of a new governor who favors aggressive monetary easing could lead to sharp falls in the forint, thus limiting the room for actual policy loosening, while the choice of a governor in favor of cautious easing would be more likely to win market confidence, allowing rates to be cut further.

At its latest monetary policy meeting, the National Bank of Hungary lowered its benchmark interest rate by a quarter percent to 5.5 percent as expected.

RTTNews