City says Hungarian CPI target set to remain

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Hungary's CPI target is unlikely to change even after the issue has recently resurfaced, but an open clash between decision makers could be counterproductive, London-based emerging markets analysts said.

In its daily emerging markets comment, Goldman Sachs quoted Finance Minister János Veres as saying that the 3% inflation target may be too lotime when inflation in other European countries is above this level.

This comes only days after the Finance Ministry and the central bank (MNB) supported the 3% target in a joint statement.

The inflation target is set together by the MNB and the Finance Ministry, and "in our view the MNB would not agree to change it".

"We think that the Finance Ministry is aware that an open confrontation on this issue with the MNB would not serve its aim of having lower interest rates and would be counterproductive, and we do not expect it to go that far".

But even airing the idea may have increased the risk premium already, although the major moves on the FX and fixed income markets are likely to have been caused by external factors like the hawkish language from the ECB and position unwinding, Goldman Sachs said.

"We expect the inflation target to remain in place, and the MNB to tighten policies further in an attempt to try to achieve it", it added.

The comment echoes other London-based analysts' view that raising the CPI target should not be the answer to renewed inflationary pressures.

4cast, a City-based forecasting think-tank said late last week that lifting the CPI target would bring no advantage to either sides: the MNB will lose its credibility and the ministry will have to foot an even higher bill on public debt via the extra costs of a rise in long term rates.

Markets have anyway long been accepting Hungary's regular overshooting of its CPI target - the same goes to the ECB - and the MoF also knows that there is some flexibility implied in the target in the case of external shocks. There is no need to raise the target to get additional puffers, these puffers exist anyway, 4cast explained.

In a separate comment released over the weekend in London, however, JP Morgan said that the adoption of inflation-targeting regimes in emerging market economies occurred in most cases on the eve of "a golden and unprecedented period" of rapid EM growth and falling inflation. With EM inflation now having turned sharply higher, however, the credibility of these regimes is being tested, and took an additional hit last week after Turkey's central bank decided to raise its inflation targets for each of the next three years.

Turkey's "risky strategy" will likely trigger a debate about the merits of such a move elsewhere, JP Morgan said. (MTI – Econews)

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