Economy
Hungary cenbank could face more serious challenges in 2017
Save article
Share
Macro background - Recent data and events
- November CPI came in at 1.1% yr/yr, and core CPI was up 0.1%m/m and 1.5% yr/yr, picking up speed from October (1.4% yr/yr). “On a 3m saar basis, core prices were actually rising by around 2% already in November. While the November CPI came in a bit softer than the market (1.2%Y), a 4-5%M rise in petrol prices in December will bring CPI as high as 1.8%Y already (out on January 13)," commented Pasquale Diana, Head of CEEMEA Economics at Morgan Stanley in London. He thinks inflation will surprise to the upside in the coming months.
- Third-quarter GDP details showed a 0.2%q/q and 2.2%yr/yr rise in GDP (1.6% yr/yr on seasonally adjusted data). Looking at the SA data, household consumption accounted for all of the growth (1.5pp contribution), whereas investment remained quite weak (-2.7pp contribution) and net trade was broadly neutral on weak exports (-1.9%Q), Diana noted. He added it is important to recognise that “the latest round of fiscal easing (see below) is reaching the economy at a time when consumption is already running quite strong, and when lending to households is growing again."
- A sweetener to boost lending? The authorities mentioned that they would look to lower the financial transaction tax (FTT) for banks that boost lending more than 20% in 2015-17. The relief will be worth 0.6% of the growth in lending but no more than 80% of total FTT payable.
The big macro view
- Pro-cyclical stimulus and EU funds will boost growth: In their recent update, MS took their growth forecasts for 2017 up to 2.9% yr/yr (previous: 2.5% yr/yr), on higher fiscal stimulus and an expected rebound in EU flows. This would be much higher than Hungary's potential growth, which MS estimate at around 1.7% yr/yr.
- Inflation set to exceed expectations: The government announced a plan to boost wages in a labour market which is already very tight, the fiscal stance is loosening and consumption is running strong. While some believe there is slack in the economy, Diana said he would take a more cautious view and view CPI risks as tilted to the upside.
- Monetary policy - benchmark rate increasingly irrelevant: “The NBH is adopting an ultraloose monetary policy stance which aims at maintaining monetary conditions as loose as possible within the constraints of a structural drop in excess liquidity," Diana said. The bank has introduced an array of instruments to manage liquidity which go well beyond the benchmark rate, and has pushed Bubor well below the policy rate, he reminded. These include the 3M deposit cap, FX swaps and the rate corridor among others.
Interesting cenbank decision up next
In Diana’s view, the upcoming policy meeting of the NBH on 20 December is potentially an important one.In November the NBH made it clear that it stands ready to ease monetary conditions further using unconventional instruments. While the room on the corridor (now -0.05-0.90%) seems to be exhausted now, we would not rule out further tweaks to the toolbox.
Moreover, the NBH will announce the new cap for the 3M depo facility, to be reached in March 2017. As background, the end-2016 cap is HUF 900 bn.“Bubor is trading much lower than the base rate already, so it is not obvious that the NBH needs to lower the 3M cap to push more liquidity into the front end," Diana said.
“an aggressive 1Q17 cap (to around HUF400-500bn, for example) would make it extra clear that the NBH seeks to engineer ever-lower yields at the front end."
Finally, the NBH will update its GDP and CPI projections. Diana thinks that while the GDP forecast for this year will be marked-to-market lower (from 2.8% yr/yr to around 2% yr/yr), next year's number may well be bumped up from 3% yr/yr on more aggressive fiscal easing.But the focus will be squarely on the wage and CPI forecasts, he added. Diana projects the 2.3% yr/yr CPI forecast for 2017 to be adjusted upwards, “given that the 15% minimum wage increase will fuel wage pressures which productivity cannot fully offset." Also, the NBH will introduce a 2018 forecast for the first time. For reference, Morgan Stanley’s current CPI forecast shows 2.6% yr/yr in 2017 and 3.0% yr/yr for 2018. Here’s what analysts projected in a recent Portfolio survey.
Where do Morgan Stanley’s views differ?
There is a widespread perception that the authorities would welcome a weaker HUF. While this may well be true, Diana noted that the balance of payments still looks supportive for the long-term HUF outlook.“While the authorities' emphasis on pushing domestic demand stronger can ultimately erode the C/A surplus somewhat, we would also argue that faster inflation will increase the NBH's tolerance for a stronger HUF," he said.
The economist also expects a more challenging period ahead for monetary policy. Diana noted that as interbank rates diverge sharply from the benchmark rate, the overall monetary policy stance has become less predictable and less transparent.
“While the NBH's desire to loosen monetary conditions is understandable this year (given low inflation and disappointing growth), 2017 could present more serious challenges. We see a risk that the NBH will likely be seen as 'behind the curve' in normalising interest rates."
Diana stressed that price pressures are already higher than CPI suggests. He reminded that core inflation in Hungary has been higher than in the rest of CEE and was running at 2% on a 3m annualised basis already in late 2016.
“The upcoming rise in minimum wages and ULC growth will just add to these pressures in 2017. We are above consensus on CPI in 2017 (MS: 2.6%Y, cons: 2.0%Y) and 2018 (MS: 3.0%Y, cons: 2.6%Y)," he said.
