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Sharp Rise in Inflation may Trigger Faster Action by MNB

Food

Annual headline inflation accelerated to 3.7% in March, coming in way higher than analysts had expected. The question is, will the central bank also speed up the normalization process it started a few weeks ago?

Hungary’s annual headline and core inflation figures reached 3.7% and 3.8%, respectively, in March, which is near the top of the National Bank of Hungary’s 2-4% target range. The unexpected acceleration was mainly caused by a rise in the excise tax on tobacco and higher food prices. Annual headline inflation rate was 3.1% in February. The central bank also said that its measure of core inflation excluding indirect tax effects rose 0.3 of a percentage point to 3.5% in March.

Analysts had expected a slightly slower rate of 3.5% in March. Apart from last October’s annual rise of 3.8%, consumer prices have not grown to such an extent year-on-year since January 2013. Core inflation, which strips out seasonally volatile products, increased by an annual 3.8% in March, after 3.5% in February and 3.2% in January. The last time core inflation rate was higher than this was in December 2012, when it stood at 4.9%.

Compared to March 2018, last month’s food prices were up by 5.4%, within which the prices of seasonal food items (fresh vegetables and fruit) rose by 21.1%, flour by 12.3%, and bread by 6.7%, while the price of eggs fell by 12.5%, milk by 7.2% and sugar by 3.9%. Prices of alcoholic beverages and tobacco rose by 8% on average, within which tobacco prices rose by 10.9%. Consumers paid 3% more for services, while motor fuel became 3.7% more expensive.

In January–March 2019, compared to the first three months of last year, consumer prices went up by 3.2% on average.
In its quarterly “Inflation Report”, released at the end of last month, the central bank predicted CPI would continue to rise in March before dropping under the 3% mid-term target again in the summer.

Sharp and Fast Rise

Takarékbank analyst Gergely Suppan attributed the higher-than-expected rise in consumer prices to the sharp and fast rise of prices of seasonal food and tobacco products. He also emphasized that inflationary pressure has built up, as shown in the rise of core inflation, followed by the tax-filtered core inflation.

If the latter data exceeds the central bank’s expectations, the monetary council is likely to carry on with its normalization process, the analyst believes. According to him, inflation can come in at around 4% in the coming months, basically due to the lower fuel prices we saw this spring. As for average annual inflation rate, Takarékbank analysts raised their projection to 3.4%.  

K&H Bank head analyst Dávid Németh said that the increasing real wages and the livening domestic consumption caused by those higher wages could pose an inflationary risk. He added that food, tobacco and alcohol prices had also attributed to the acceleration of the March inflation rate.  

According to him, the next few months might bring a slowdown in the rate, with the yearend seeing another acceleration. Core inflation might run an opposite course, as due to consumption and rising wages, it could accelerate in the upcoming months. If the current trends continue, the central bank might react by tightening its monetary conditions, he warned.  

If tax-filtered core inflation continues to rise in the coming months and remains above 3%, and the inflation forecast also rises, the central bank will deploy further actions to narrow its swap liquidity and it might also raise its one-day interest rate, CIB Bank analyst Sándor Jobbágy told state news agency MTI. The data-based monetary policy, however, will only adjust to the minimally necessary extent, Jobbágy added.  

Economic research institute Századvég also emphasized that the inflation rate is getting closer to the upper end of the central bank’s inflation target. Gábor Regős, head of the macroeconomics division of Századvég said that if current inflation trends are here to stay, the monetary council will decide on further tightening actions at its June rate-setting meeting. In this case, the annual inflation rate will be slightly above the 3% target. The strengthening of the forint might greatly attribute to the slow-down of inflationary trends, he noted.

The International Monetary Fund has raised its projection for Hungary’s GDP growth this year to 3.6% in its fresh “World Economic Outlook”. The projection was raised from 3.3% in its previous forecast, released last October, but is still under the government’s forecast of 3.9%. As for 2020, the IMF expects Hungary’s GDP growth to slow to 2.7%. The IMF also projects that average annual inflation will pick up to 3.2% this year, before edging back to 3.1% in 2020. It sees the unemployment rate dropping to 3.5% in 2019 and to 3.4% in 2020. The current account surplus is set reach 0.5% of GDP in 2019, level with last year, before widening to 0.6% in 2020.

Numbers to Watch in the Coming Weeks

The second estimate of industrial production in February will be released on April 12, following a massive 5.9% year-on-year increase reported in the first estimate on April 5. The Central Statistical Office will publish February construction data on April 15.

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