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City major cuts Hungary rates trough forecast

Hungary's policy rate is set to trough lower next year than previously anticipated as consumer inflation figures keep surprising markets on the downside, a major City-based investment group said in its latest country forecast update.

JP Morgan said it is revising down its MNB policy rate forecast by 50bps to 5.50% in response to unexpectedly low inflation and weaker real activity data in recent months.

“We now expect the MNB to cut to 5.50% by 1Q10 (previously 6.00%), with risks skewed further to the downside if the forint appreciates further early next year ... purely from the perspective inflation and the depth of Hungary's recession, even sub-5.50% rates would probably be justified.”

A reversal of positive risk appetite and potentially negative news on the 2010 budget remain the key risks to more aggressive MNB easing, JP Morgan said.

Despite a substantial hike in indirect taxes at the start of July, CPI inflation has picked up only modestly, reflecting weak pricing power against a backdrop of sharply contracting domestic demand, amplified by unexpectedly sharp food price declines.

Based on all this, JP Morgan said it has revised its year-end CPI forecast for 2009 to 5.5% year-on-year from 5.8% and continues to see inflation falling below the MNB's 3% target in the second half of 2010. Its end-2010 CPI forecast is 2.8%, it added. (MTI-ECONEWS)