Economy
Hungarian rate setter Karvalits tells Citigroup supply shocks remain the biggest threat to CPI outlook
“The NBH is somewhat surprised that the forint has been periodically caught up in the same category as countries with much larger external financing requirements - Romania, South Africa, Turkey - where signs of adjustment are less convincing than they have been in Hungary," David Lubin, Head of CEEMEA at Citibank said.
Karvalits was cited as saying that Hungary's net external financing requirement fell to 4% GDP from 8% GDP between 2004 and 2007, and that the NBH expects a further decline in the financing gap to 2% GDP in 2010.
“This is partly due to the continued fiscal adjustment that the NBH expects - Karvalits' view was that the 4% fiscal deficit target for 2008 is broadly achievable, as is the 3.2% target for 2009 - but also it is due to the NBH's expectation that consumer spending will remain constrained in the foreseeable future, reducing the risk of any acceleration in import growth."
Supply shocks biggest threat
The NBH justifies its view that year-end 2009 inflation will be just over 3% by pointing to the widening output gap, and in particular by suggesting that wage behaviour should become less disturbing in time, Lubin noted.
“Karvalits emphasised that the recent pickup in wage growth is linked to a prior minimum wage agreement whose impact on wage data should diminish in due course."
Having said that, “the most obvious risk the NBH seems to worry about is the sustained supply shock to which it has been subject", Lubin noted, citing Karvalits as expressing the view that cost shocks are “getting more dominant and permanent".
“The two mechanisms by which these shocks can create second round effects are: a) through wage bargaining, where the Bank seemed reasonably optimistic; and b) through expectations."
Citigroup's assessment of Karvalits' message is that the case for further monetary tightening “rests largely on the idea that the NBH would need to react if inflation expectations become destabilised".
The Monetary Council said after the April policy meeting that inflation risks made it necessary to raise the base rate (by 25 bps to 8.25%), adding that the “Monetary Council will continue to stand ready to take the necessary actions, in order to meet the Bank's inflation target."
Lubin said the overall message, therefore, retains some bias towards tightening.
More structural reform needed
Lubin said Karvalits was hopeful that the government's proposed fiscal rules would have some impact on budget discipline, as would the creating of a supervisory agency for public finances.
In the longer term, Hungary's growth potential can only be boosted by increasing the incentives to work, and by increasing labour participation.
“Karvalits emphasised that there are some measures along these lines that can be adopted without recourse to legislation, and expressed confidence that the government will do what it can in this respect," Lubin added.
Karvalits was cited as saying that Hungary's net external financing requirement fell to 4% GDP from 8% GDP between 2004 and 2007, and that the NBH expects a further decline in the financing gap to 2% GDP in 2010.
“This is partly due to the continued fiscal adjustment that the NBH expects - Karvalits' view was that the 4% fiscal deficit target for 2008 is broadly achievable, as is the 3.2% target for 2009 - but also it is due to the NBH's expectation that consumer spending will remain constrained in the foreseeable future, reducing the risk of any acceleration in import growth."
Supply shocks biggest threat
The NBH justifies its view that year-end 2009 inflation will be just over 3% by pointing to the widening output gap, and in particular by suggesting that wage behaviour should become less disturbing in time, Lubin noted.
“Karvalits emphasised that the recent pickup in wage growth is linked to a prior minimum wage agreement whose impact on wage data should diminish in due course."
Having said that, “the most obvious risk the NBH seems to worry about is the sustained supply shock to which it has been subject", Lubin noted, citing Karvalits as expressing the view that cost shocks are “getting more dominant and permanent".
“The two mechanisms by which these shocks can create second round effects are: a) through wage bargaining, where the Bank seemed reasonably optimistic; and b) through expectations."
Citigroup's assessment of Karvalits' message is that the case for further monetary tightening “rests largely on the idea that the NBH would need to react if inflation expectations become destabilised".
The Monetary Council said after the April policy meeting that inflation risks made it necessary to raise the base rate (by 25 bps to 8.25%), adding that the “Monetary Council will continue to stand ready to take the necessary actions, in order to meet the Bank's inflation target."
Lubin said the overall message, therefore, retains some bias towards tightening.
More structural reform needed
Lubin said Karvalits was hopeful that the government's proposed fiscal rules would have some impact on budget discipline, as would the creating of a supervisory agency for public finances.
In the longer term, Hungary's growth potential can only be boosted by increasing the incentives to work, and by increasing labour participation.
“Karvalits emphasised that there are some measures along these lines that can be adopted without recourse to legislation, and expressed confidence that the government will do what it can in this respect," Lubin added.
