Prolonged recovery likely to have 'persistent' disinflationary effects

MNB

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A slow economic recovery from the coronavirus crisis is likely to cause "persistent" disinflationary effects in Hungary, but "volatile" pricing decisions warrant an "exceptionally cautious approach" when assessing those effects, the National Bank of Hungary (MNB) said in a quarterly Inflation Report on Thursday, according to a report by state news wire MTI.

"In terms of underlying inflation, a prolonged economic recovery is likely to cause disinflationary effects to be persistent. In addition to the moderate external inflation environment, weak domestic demand also points to a slowdown in price growth," the central bank's rate-setting Monetary Council said, outlining the main findings of the report.

"The time profile of the pandemic and the expected economic recovery may continue to result in volatile pricing patterns; therefore, an exceptionally cautious approach is warranted in assessing more persistent inflationary effects," the policymakers added.

The inflation rate is expected to rise to "around 4%", temporarily, in the spring of 2021 as excise tax rises on tobacco products come into effect, but fall later, according to the report. MNB puts CPI at 3.5%-3.6% for 2021, with the tobacco excise tax increase contributing 0.4 percentage points to headline inflation.

MNB projects core inflation excluding indirect tax effects - a bellwether indicator of underlying inflation - will fall to 2.8%-3% in 2021 from 3.7% in 2020.

The increase in unprocessed food prices is set to slow to 4.7% in 2021 from 11.8% in 2020, while fuel and market energy prices climb 4.1% after declining by 4.7% in 2020.

MNB sees CPI falling to 2.9%-3% - around the central bank's 3% mid-term "price stability" target - in 2022, as core inflation excluding indirect tax effects drops to 2.7%-2.8%.

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