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City sees March CPI “below 3% target”

  Hungary’s consumer price inflation is likely to have dropped under the MNB’s (central bank) 3% target in March, London-based emerging markets analysts said in early forecasts before the data release due on Friday.

In one of the more cautious forecasts in the City, Goldman Sachs said that it expects March inflation to edge down “only slightly”, to 2.9% year-on-year from 3.0% in February, as the FX pass-through “largely counterbalances” the downward pressure on prices from the slowing economy.

In particular, food inflation has picked up since the start of the year, and “we see some upside risks to our inflation forecast if this is sustained”.

GS said it thinks the MPC will continue to focus on the FX stability, with data on inflation and industrial output having a smaller influence on decisions. It added it expects the MPC to keep rates at 9.5% over the next 12 months, opting to hike only if the MNB is unable to prevent another rapid sell-off in the HUF with its other tools.

On a more bullish note, JP Morgan said that Hungary’s inflation likely slowed to around 2.7% on the back of substantial food and fuel price base effects which “should have more than offset” any further pass-through from forint currency (HUF) weakness.

It said, however, that the forint is “clearly the main driver” of the central bank’s rate decisions, and it was the increased HUF volatility that caused the MPC to halt its easing cycle in February.

Moreover, recent inflation data over the past month have confirmed rapid pass-through from HUF depreciation, in spite of the deepening domestic recession. Therefore, “we expect the MNB to keep the base rate at 9.50% for the next three to six months as (the central bank) will remain focused on risks to financial stability stemming from a weaker currency”, JP Morgan said.

In contrast, Bank of America-Merrill Lynch said it sees scope for further easing should the forint stabilize or strengthen. It said inflation has likely eased further in March to 2.7%, bringing the CPI rate to below the MNB’s 3% target, with the short-term trend suggesting a further decline. Combined with the deepening recession, “this may prompt the MNB to resume the easing cycle in April/May”.

The outlook for monetary policy “has become more complicated” due to a sharp HUF depreciation. However, “in our base case scenario we expect interest rates to fall to 6.75% (by) end-2009”, Bank of America-Merrill Lynch said. (MTI-Econews)