CPI could fall to 3% in H1 2013 - MNB

MNB chief analyst Barnabás Virág said when the report was published that the forint could firm on the back of an improved risk assessment of the country from the second half of 2012. He added that as long as macroeconomic indicators are in line with the MNB's fresh projections, and if Hungary's risk assessment improved from mid-year, the central bank staff thinks the base rate could be reduced from the fourth quarter.

The central bank said on Tuesday that it raised its projection for average annual inflation in 2012 to 5.6% in the report from a 5.0% forecast last December.

The MNB said the projection for inflation was "significantly above" the central bank's target for this year because of cost shocks and increases in indirect taxes, but could fall back to 3% by early 2013 as the direct inflationary effects of the indirect taxes subside. It projected CPI would rise to 5-6% this year on rising commodity prices and the increases in taxes. But it said CPI would "fall quickly" to meet the inflation target early in 2013 as the effects of the indirect tax increases wane and commodity prices stabilise.

The MNB put raised its projection for core inflation, which excludes volatile food and fuel prices, to 5.3% from 4.6% for 2012, and to 2.9% from 2.4% for 2013. It raised the projection for core inflation without the effects of indirect taxes to 3.0% from 2.7% for 2012, and to 2.7% from 2.1% for 2013.

The MNB kept its GDP projection for 2012 unchanged from the previous report at 0.1% growth.

The government targets GDP growth of 0.5% this year.

The MNB raised its projection for CPI in 2013 to 3.0% from 2.6%. It lowered its forecast for GDP growth to 1.5% from 1.6%.

The MNB said the outlook for domestic growth continues to be shaped by a combination of slowing global growth and persistently weak domestic demand. "Balance sheet adjustment by economic agents both at home and in Europe is expected to continue, which points to a subdued outlook for domestic growth on the forecast horizon," it added.

The MNB projects household consumption will fall 0.9% in 2012 but edge up 0.2% in 2013.

The MNB said government measures will improve labour activity, but it added that labour demand would not change in the forecast horizon and the labour market would probably remain loose because of the weaker outlook for growth prospects, restraining growth in nominal earnings. Growth in earnings is expected to slow again, accompanied by persistently high unemployment, in 2013, it said.

The MNB projects this year's general government deficit would reach 3.1% of GDP if reserves are frozen and fall to 2.9% if further measures that have already been announced are carried out.

Additional savings equivalent to 0.4% of GDP, or HUF 100 billion-110 billion, would have to be made to reach the 2.5% target in the Convergence Programme.

The government budget made a positive contribution to aggregate demand growth in 2011; however, a contraction in demand equivalent to 3% of GDP will be needed in the coming two years to meet the government's fiscal deficit targets," the MNB said.

The MNB puts the general government deficit at 4.3% of GDP in 2013, or at 3.4% if free central reserves are cancelled.

The MNB noted "considerable uncertainties" surrounding the projection in the report, mainly related to future changes in risk perceptions about the Hungarian economy and commodity prices.