London economists: MNB not under pressure to tighten

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The National Bank of Hungary (MNB) is not under pressure to tighten monetary policy, though some policy guidelines at this month’s meeting of the MNB’s Monetary Council would help strengthen its credibility, London-based emerging markets economists said on Monday.

Analysts at BofA Merrill Lynch Global Research, a research unit of Bank of America Merrill Lynch, said in their "Emerging Insight" report released in London that it has turned out to be a relatively calm summer, "suggesting to us that the MNB is not under any significant pressure to tighten policy soon."

"We wrote in early July that the central bank was likely nearing the pain threshold if EUR/HUF sustainably stayed at 330 or above through the summer," the report continued. "Such a scenario, in our calculations, would have led to inflation near the 4% upper bound in the third quarter (...) and more prolonged overshooting of the 3% target, adding to the markets’ unease about the dovish policy stance."

In turn, this could have made the forint even weaker, leading to more inflationary risks, the report added. However, with relatively calm HUF developments in the past two months, BofA Merrill Lynch said, "we think inflation is likely to peak around 3.5% in the third quarter before moderating towards 3% by mid-2019 - [which] is a much milder inflation profile in the MNB’s favor, in our view."

Meanwhile, the evidence of exchange-rate pass-through, a measure of how responsive international prices are to changes in exchange rates, is still limited, according to the report.

The July inflation reading, at 3.4%, was exactly in line with the MNB’s forecasts, it added, noting that the only major upside was the new vehicle component, rising 3.1% month-on-month. This could be an early sign of FX pass-through, it observed, athough adding that a single item is not yet sufficient to confirm an upward price adjustment process in the economy. The MNB will likely keep a close eye on this, "but we believe it is in no rush to react," the report concluded.

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