Hungary Nov CPI -0.7% yr/yr - Will the c.bank restart its easing cycle?

Hungary’s inflation has once again surprised market players and decision-makers alike. The drop in the 12-month index was the largest yet, whereas analysts were expecting the one-off shock impacts to be gone from the headline figure. Inflation dropped further although the impact of the government-mandated utility tariff cuts from last autumn dropped out from the index.

The further decline is primarily attributable to energy price cuts driven by a drastic decrease in the world market price of crude oil.

What is really interesting here is that core inflation dropped considerably to 1.2% yr/yr from 1.5% in October. This means that underlying inflation developments are also retreating and the disinflationary environment appears to be general.

The 0.1% q/q drop in core inflation may be considered as an extremely bad omen.

There is a mitigation of price pressure on almost every front. We see it in the case of foodstuff (which may have to do with the impact of the Russian embergo), tobacco and alcohol products (also the base effect), fuels (world market prices) and services. The latter does not really suggest that domestic demand is recovering very much, although we should see improvement on this front. That is why it is especially interesting why this is not reflected in the price of demand-sensitive products.

Only the relatively weak forint is dampening the fall of prices via import prices, at least this is what the change in the price of consumer durables and clothing shows.

Could a rate cut follow?

We may justifiably ask if the Hungarian central bank, which follows the regime of inflation targeting, could be forced to lower rates further if inflation remained this much below the course assumed by the market and the MNB itself. The Monetary Council considered the much lower than expected CPI in September as the result of one-off shocks, and then it stressed in the minutes of its 25 November policy meeting that it does not feel it should change the base rate for the time being.

We believe that there needs to be several subsequent inflation surprises before the MNB changes its stance on this. However, it can also be a nudge in this direction that most analysts expect never-before-seen asset purchases by the European Central Bank next year. If the ECB was to buy government bonds, the MNB would have a bigger room to restart its easing cycle.

• Tags:
• MNB,
• cpi,
• economy,
• central bank,
• consumer price index,
• inflation,
• monetary policy