MNB keeps inflation projections under 3%

MNB

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Hungaryʼs consumer inflation will reach the central bankʼs 3.0% mid-term target "by the middle of 2019," the National Bank of Hungary (MNB) said in its quarterly report released in full on Thursday, summarized by state news agency MTI.

The projection for achieving the target was unchanged from the one in the previous quarterly Inflation Report, although the MNB acknowledged that higher crude prices had lifted the forecast for prices of non-core goods, while core inflation could climb at a slower pace.

As initially announced on Tuesday, the MNB lowered its annual average inflation projection for this year from 2.4% to 2.3% in the latest report. Hungaryʼs CPI was 2.4% in January-November, the latest data from the Central Statistical Office (KSH) shows.

The MNB has left its projections for inflation in 2018 and 2019 unchanged at 2.5% and 2.9%, respectively. It projected inflation would reach an average annual 3.0% in 2020.

Following a temporary rise in CPI in November, the central bank projects inflation will fall close to 2% and level off to the bottom edge of the 3%+/-1 pp tolerance band in the first months of 2018. It said a gradual rise in core inflation "may be more moderate than projected" in the previous Inflation Report released in September.

Second-round inflationary effects resulting from strong domestic demand, increased wage costs and higher commodity prices point to an increase in domestic core inflation, but underlying inflation trends in the eurozone are "persistently subdued," which curbs the inflation rate in Hungary, the MNB explained. Low household inflation expectations, payroll tax cuts and VAT rate reductions are also slowing inflation, it added.

Investment outlook lifts GDP forecast

As likewise reported on Tuesday, the MNB has also raised its projections for this yearʼs GDP growth from 3.6% to 3.9%, and from 3.7% to 3.9% in 2018, noting "more favorable investment processes."

The MNB left its projection for 2019 unchanged at 3.2%, and now augurs 2.7% growth for 2020.

Hungaryʼs GDP grew an unadjusted 3.8% in Q1-Q3, the latest data show, but the MNB said it assumes routine revisions will add 0.1 percentage point to that figure.

Commenting on the adjustment Thursday, the MNB said investments are expected to "increase dynamically" in the first half of the forecast horizon, supported by the strengthening of underlying corporate investment trends, a pick-up on the housing market, low interest rates, central bank programs and the absorption of European Union funding.

In the second half of the forecast horizon, growth is set to slow as corporate investments wind down, drawdowns of EU funding decline, and the temporary reduction in the VAT rate on home construction ends. However, the favorable international outlook points to more buoyant growth in external demand which has lifted the projection for export growth, it added.

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