In a research note released to clients in London, Royal Bank of Scotland (RBS) said that the most recent CPI data highlights downside risks to inflation as headline CPI arrived at -0.4% year-on-year last month, well below the market consensus of -0.1%.
“At a time when growth is likely to slow and downside risks to inflation remain apparent, we believe that the MNB will become increasingly uncomfortable with currency strength, as a stronger HUF would only increase the downside risks to growth and inflation… We think that the MNB may consider further monetary policy easing in the coming months if these trends persist,” the note said.
The latest Inflation Report indicated that the monetary policy council is looking to counter the downside CPI risks with a prolonged period of unchanged rates, rather than further cuts. Yet, “we believe easing in a conventional form of policy rate cuts would return to the agenda if the current EM rally persists and the forint appreciates notably, for instance EUR/HUF being pushed down to 300… This could be the case given the increased likelihood of the ECB QE2 and the Fed hikes being persistently priced out”.
In this case, “we believe significant HUF appreciation would mean the MNB would not be able to avoid rate cuts, in spite of the decreased FX-to-CPI pass-through in Hungary over recent years”, Royal Bank of Scotlandʼs economists said.
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