Economy 10 December 2018, 4:44pm

Huge turnaround in Hungary: CPI has not done this for eight months

Portfolio

After Hungary’s annual inflation accelerated close to a six-year high in October 2018, consumer prices rose at a less drastic pace in November, mainly due to a sharp fall in oil prices, analysts polled by Portfolio projected on Monday. They expect the Central Statistical Office (KSH) to report 3.4% headline figure on Tuesday morning that would put an end to an 8-month ascending trend. The ebbing price pressure would do a huge favour to the National Bank of Hungary (MNB), as the repeated upside surprises in inflation put the rate-setters in an increasingly awkward position.

Over the last few months, the MNB found that the room between a rock and a hard place is getting tighter and tighter due to rising inflation. Consumer prices were up 3.8% yr/yr in October, which was the highest CPI since December 2012.

The central bank had projected inflation to peak out at 3.4% in September, and in view of that the October figure really stood out. Not to mention that measures of underlying inflation also suggested that price pressure was mounting in the Hungarian economy, something the Monetary Council has also acknowledged in its post-meeting statement last month.

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Inflation exceeding the central bank’s expectations was bad for the MNB because it had been stressing for months that reaching the inflation target (3% +/-1ppt tolerance range) was not in jeopardy therefore maintaining its loose monetary policy was justified, although several central banks have already started to tighten monetary conditions or was already edging towards tightening. Market players started to have doubts whether the MNB was on the right track when it kept emphasising that in view of local inflationary processes, maintaining the ultra-loose monetary policy stance was the way to go. This “credibility battle" did not leave the forint unfazed, either, over the last few months.

Approaching the top of the tolerance range made it difficult for the MNB to (credibly) defend its position. Or, it was losing the credibility battle if you like. In November, however, the world market price of oil started to take a plunge and a sigh of relief by the central bank was almost audible, given it did not have to worry any longer about inflation rising to 4.0% by the end of the year. This could have weakened the forint markedly, as it would be pushed in front of the investors’ cross-hairs if they started to think the MNB - driven by some unknown objective - would not surrender its overly loose monetary policy stance despite what inflationary processes dictated.

Due to drop in oil prices, analysts polled by Portfolio expect a significant decrease in the price pressure. The consensus estimate came in at 3.4% for November’s headline CPI.

The data is to be fundamentally dominated by motor fuel prices once again, only this time the direction is going to be down rather than high. We believe the drop in fuel prices shaved off 0.3 percentage points from the headline figure in November

, said Orsolya Nyeste, analyst at Erste Bank in Budapest.

Péter Virovácz, analyst at ING Bank in Budapest, thinks that the major drop in inflation will soothe markets and it is also possible that the decreasing oil prices will convince the MNB to lower its CPI estimate for 2019. This is how the central bank could communicate that it is not forced to take action in terms of a turnaround in monetary policy. At the same time, Virovácz added that core inflation could rise further. As it was already well above the MNB’s forecast, we should definitely monitor this index even more carefully.

In view of the estimates for 2019, inflation is unlikely to accelerate substantially next year. The forecasts for end-2019 are very close to 3.0%. It seems that a 4.0% 12-month index can be avoided due to favourable processes on the oil market and also thanks to base effects, but the MNB cannot put off the launch of monetary tightening much longer, as the price indices gauging underlying processes indicate a gradual rise in local inflationary pressure.