Hungarian inflation eases to 6.9% in February - extended

Headline price rises eased from January’s 7.1% while core inflation, which excludes volatile unprocessed food prices, picked up to 5.3% from 5.2%, the Central Statistical Office (KSH) said on Tuesday. “Primarily household energy -- both natural gas and electricity -- pushed prices higher,” statistician Borbála Minary said. While market gas prices rose 5% on the month a subsidy cut meant prices to consumers rose 15%, he noted.

Electricity prices also rose 9.8% on the month and pressure continued from rising food prices. The central bank should take some comfort as price pressures came from food and energy, as well as the removal of subsidies, analysts said. These factors are largely outside the bank’s control. “The fact that the figure highlights the downward adjustment of the CPI path is definitely positive for markets, which are also benefiting from the better global mood this morning. We also retain our expectation for a flat policy rate this month," said Illés Tóth at DZ Bank in Budapest.

Last month the central bank sharply raised its 2009 inflation forecast, its key policy target, to 3.6% from 3.0%. It has also come under pressure to raise interest rates from rising bond yields and a rocky forint. The currency rose after the prices data to 263.60 to the euro, up from 264 in late Monday trade. “At first sight, based on the KSH’s figures, there is no demand-led price pressure in the economy and that’s the same as what we could see in the previous months,” said Orsolya Nyeste at Erste Bank in Budapest.

But while the inflation path is positive, the credit crunch in global markets and Hungary’s poor economic fundamentals have exposed it to sell- offs. This will be just as important at the central bank’s next policy meeting on March 31. Hungarian bond yields have risen around 100 basis points over the past two weeks due to global risk aversion. “Higher rates might be necessary from a risk management point of view. Rising risk spreads require a higher base rate in order to avoid a possible sharper forint easing and it could be also necessary to stabilize the long end of the yield curve,” said Dániel Bebesy at Budapest Fund Management. (Reuters)