MNB to ease soon, but politics may weigh on MPC, City says

Analysis

Hungary’s central bank is set to embark on a potentially substantial easing cycle from early next year as the inflation outlook is gradually improving, but policymakers are likely to remain cautious in the short run as long as political uncertainty lingers, London-based emerging markets analysts said on Friday.

In its daily Emerging Markets Today research note, JP Morgan said of the August inflation data released the previous day that the year-on-year CPI looks to be on track to fall to 5.3% by year-end. This would be broadly consistent with the MNB’s latest inflation projection which sees inflation dipping to below the 3% target by mid-2010.

The improving inflation outlook coupled with a weak growth backdrop suggests that the MNB can afford to loosen monetary conditions “somewhat”. “While we would expect most of this loosening to come via a weaker forint, we continue to see scope for 75-100bp in rate cuts next year as long as EUR/HUF stays below 250”, JP Morgan said.

In a separate comment, Goldman Sachs said that the details of the August CPI figures “point to disinflation”. These data are in line for a rate cut to happen around early next year; or if the HUF strengthens significantly and the oil price does not rebound, even late this year, GS said. The political uncertainty - it is not clear if the minority government will be able to push through a budget - may weigh on the fixed income market in the short term, though, it added.

Dresdner Kleinwort said in its daily note on Emerging Markets that given the previous day’s release, it expects headline inflation to ease to 5.2% year-on-year by year-end and to around 2.8% by end-2009. Core inflation is likely to stay above 4% until Q2 next year, but is set to converge to around 2.5% by late 2009. Overall, “we remain of the view that the majority of the MPC will support maintaining a cautious stance in coming months until the political situation clarifies”.

The inflation outlook is gradually improving, however, and “we expect significant monetary loosening next year”, Dresdner said. The fresh set of CPI data saw prices falling by 0.3% in August from the previous month, and the annual price inflation slowed to 6.5% from a 6.7% reading in July.

Surveyed by Econews prior to the release of the August CPI figures, analysts at nine major City-based investment banks averaged in their forecasts at 6.48%. (MTI-Econews)

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