CPI to accelerate after soft Dec figures but MNB is driven by risks, says City

Hungary’s consumer inflation is likely to accelerate after the considerably south-of-consensus 4.1% year-on-year headline rate last month, but monetary policy moves will continue to be driven by the risk environment, London-based emerging markets analysts said after CPI figures for December had been released on Friday.

Economists at JP Morgan said that inflation is "set to jump" in January on the back of the 2pp hike in the main VAT rate. However, "we do not think inflation will exceed 5% yet next month" as anecdotal evidence suggests that, due to price competition and weak demand conditions, large chain stores did not fully pass on the VAT hike, particularly on food products.

That said, there was a large increase in fuel prices in late December and in early January. "We look for inflation to average 5% this year, falling back to around 3.5% in 2013".

"We expect the MNB to keep raising rates in an attempt to strengthen the forint until the government secures an IMF/EU safety net".

In order to meet its 3% CPI target in 2013 the MNB needs tighter monetary conditions than at present and "we think EUR/HUF would need to be below 300 on a sustained basis for the MNB to feel more confident about meeting its inflation target".

"Our base case is for another 50bp rate hike on January 24, with risks tilted toward a smaller hike if next week’s discussions between Hungarian and EU officials indicate that formal talks on Standy-By Arrangement will begin in the near term".

"We see the policy rate peaking at 8% in 2Q, but believe that once a financing deal is signed, the MNB can start to reverse rate hikes ... We continue to see rates falling back to around 6% by year-end", JP Morgan’s analysts said.

London-based economist at Goldman Sachs said that over the next few months they expect inflation to accelerate again as base effects shift and the VAT hike takes effect.

However, "we continue to believe the MNB’s decisions are now being driven primarily by the aim of stabilising the forint ... Accordingly, we expect an additional 250bps of rate hikes until end 2012/Q1 as the MNB attempts to reduce the short-term risk of capital flight".

However, "the exact amount of tightening remains difficult to predict, given the uncertainty around both government decisions and the external environment", Goldman Sachs said.