Economy 23 March 2021, 3:03pm

Hungary central bank raises CPI forecast for 2021

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The National Bank of Hungary (MNB) has left monetary conditions on hold on Tuesday, as expected, and published its updated GDP and inflation forecasts. The bank's Governor György Matolcsy and Deputy Governors are currently holding a press conference, which is watched closely by investors looking for messages in respect of the extremely weak forint and rising inflation expectations. Matolcsy assured that a spike in the consumer price index will be only temporary.

Rates on hold

MNB Deputy Governor György Matolcsy said today's on-hold decision sends a message that the bank maintains stability and a supportive environment. He warned against voices saying the general government deficit, debt and inflation do not matter. Whereas there will be flukes in the latter in teh spring, these will be caused mainly by external factors, he said.

The central bank considers these impacts temporary and we should not expect jumps in inflation to reoccur even from early 2022. The MNB expects the consumer price index to stabilise around 3.0% by the start of next year.

MNB raises CPI estimate for 2021

The central bank is set to release its updated quarterly Report on Inflation on Thursday, but until then - as usual - it has published its key estimates on gross domestic product and inflation.

The bank upped its 2021 annual average inflation estimate to 3.8-3.9% from 3.5-3.6% in December 2020, while it adjusted its GDP forecast for this year to a range between 4.0% and 6.0% from 3.5-6.0%.

The darker areas on the GDP fan chart (below) show the scenarios that will materialise with a higher probability. As for the CPI fan chart, we should note that in the medium term it is always 'closing in on' the 3.0% target at an undisclosed interest rate projection.

CPI may breach top end of tolerance band in the spring

Deputy Governor Barnabás Virág said Hungary's inflation in early 2021 turned out as the bank expected it would. The MNB thinks CPI will be affected this year by robust cost and demand side factors, which will lead to temporary surges in the second quarter, and

inflation is likely to breach the top end of the tolerance band.

When it comes to understanding more persistent inflationary trends, the MNB pays particular attention to the measures of underlying inflation, especially to core inflation adjusted for the impact of indirect taxes, he said. It is crucial to avoid second-round, pass-through effects, added Virág.

New risk comes to the fore

The Monetary Council has identified two scenarios that could nudge the inflation trajectory upwardly:

an increase in risk aversion vis-a-vis emerging markets remains a risk;
potential second-round effects following the restart of the economy has been identified as a new risk.

If warranted by an increase in upside risks to inflation, the MNB will be ready to use the appropriate instruments, said Virág.

He also noted that the MNB will continue to use its government securities purchase programme by maintaining a lasting presence in the market, taking a flexible approach to changing the structure of weekly securities purchases, to the extent and for the time necessary.

More to follow!