Hungary’s central bank is set to keep its policy rate on hold in the long run despite a second consecutive set of CPI figures coming in considerably south of the consensus as the bank must keep an eye on a potentially deteriorating external risk environment, London-based analysts said after inflation figures for June had been released on Tuesday.

Year-on-year headline inflation rose 3.5% last month against forecasts averaging at 3.81% in an Econoews poll conducted in the City ahead of the data release.

After the figures were published, emerging markets economists at Morgan Stanley in London said that the June CPI reading should alleviate some fears of continued high external price pressures.

That said, the MNB is “the most sensitive central bank in CEE to the external environment”, and the inflation outlook alone is not a sufficient condition to alter the monetary policy course.

Therefore, “given the current vagaries of risk and the looming danger of contagion, we think the room for rate cuts is minimal, no matter how benign food prices are”, they added.

City-based analysts at JP Morgan said they now see the MNB’s policy rate on hold “for (the) foreseeable future, with balanced risks”. Previously, “we expected small rate hikes in 4Q11 and 1Q12”.

“We expect inflation to peak close to 4p% (year-on-year) in September and to end the year at 3.5-4%”.

Economists at Goldman Sachs said that with the effects of earlier price shocks now easing, and headline inflation closer to the 3.0% target, “the growing rift” in the Hungarian MPC, “visible in the minutes of the latest meeting, may deepen even more”.

The more dovish MPC members are likely to remain in favour of policy easing, especially if weakening leading indicators, domestically as well as globally, translate into a softer growth print.

However, “we continue to expect the MPC to remain on hold, with financial stability concerns still taking priority over inflation and growth outlook, amid the deepening fiscal crisis in the eurozone and given the sensitivity of the Hungarian balance sheets – and growth – to forint weakness”.

“We also continue to see the forint weakening in the six months horizon as continued repayment of FX debt puts pressure on the currency in the medium term, while the uncertainty over the fiscal situation in the Eurozone may lead to even more short-term forint weakness”, analysts at Goldman Sachs in London said.