Economy
ANALYST VIEW - Hungary cenbank faces more challenging period
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A more challenging period ahead for monetary policy
As interbank rates diverge sharply from the benchmark rate, the overall monetary policy stance has become less predictable and less transparent, said Pasquale Diana, a London-based analyst at Morgan Stanley, in a research note on Friday.While the NBH's desire to loosen monetary conditions was understandable last year (given low CPI 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
, he added.Diana noted that in terms of monetary policy the benchmark rate is “increasingly irrelevant".
“The NBH is adopting an ultra-loose monetary policy stance which aims to maintain monetary conditions as loose as possible within the constraints of a structural drop in excess liquidity," he 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. These include the 3M deposit cap, FX swaps and the rate corridor among others.
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, Diana said.
The National Bank of Hungary left the benchmark rate (0.90%) and the corridor (-0.05%/0.90%) unchanged last month. The bank highlights that CPI in December 2016 was in line with the bank’s expectations and that core inflation moved sideways.Diana said both of these look somewhat surprising to him. Morgan Stanley estimate Dec CPI was 0.2pp higher than the NBH assumption, and the majority of the core CPI measures they track were accelerating in December.
“The NBH acknowledges strong wage growth, but expects most of this to translate into a smaller C/A surplus rather than inflation," Diana said.
He does not think the two are mutually exclusive and would expect faster ULC growth to push core inflation up. The MPC statement says that real interest rates have fallen substantially and are expected to remain negative for a prolonged period, as opposed to December’s reference to the fact that they are "declining even further".
“While it can be tempting to argue that the NBH thinks we have seen the lows in real rates, we would not make too much of this. On the contrary, the official easing bias remains firmly in place: “If subsequently warranted by the achievement of the inflation target, the Council will stand ready to ease monetary conditions further using unconventional, targeted instruments".
CPI to pick up, but uncertainties greater than usual
Diana expects January CPI to accelerate to 2.3% year on year, but highlighted “that there is much more uncertainty around this print than usual, given both VAT cuts in some food items (reflected in our forecast) as well as infrequent adjustments to prices which tend to occur early in the year."If his forecast is correct, he thinks that the Q1 CPI average would be 2.8% yr/yr, well above the NBH's 2.2% projection.
If the data validate our view that the NBH's inflation view is too benign, the question of tightening or at the very least removing the easing bias would inevitably arise, we think.
In Diana’s view, this can take the form of a rise in Bubor (currently c.60bp below the benchmark rate), or a strengthening of HUF.He thinks the NBH, widely perceived to be averse to a stronger HUF, will become more tolerant of a stronger currency as both growth and CPI accelerate.
SocGen: more inflationary pressure likely
“We see a mildly increasing forecast trajectory for headline inflation in Hungary, driven by resumption of consumer demand, market services inflation, and an increasingly tight labour market," said Phoenix Kalen, analyst at Societe Generale in London, in a research note on Friday.
