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City sees scope for rates easing after high CPI

Hungary's central bank continues to have scope for resuming its easing cycle even after a significantly higher-than-expected CPI reading for May as subdued demand acts to offset inflationary pressures and the forint is likely to stabilize, City-based emerging markets analysts said.

In its daily emerging markets update released to investors in London, JP Morgan said that incorporating the 5% VAT hike effective from July, inflation could now exceed 7.5% year-on-year at year-end.

Even if the central bank (MNB) looks through this technical effect and continues to believe that contracting demand will keep underlying inflation at bay, this CPI figure calls for a cautious monetary policy stance in the near term.

“However, we maintain our call for a 50bp rate cut in (the 3rd quarter of 2009) as the HUF continues to appreciate thanks to rapid narrowing in Hungary's external financing needs and forecast a cumulative 100bp in rate cuts by year-end,” JP Morgan said.

In a separate comment, Wood and Co, an investment group focusing on Central and Eastern Europe said that the May CPI release “is clearly negative news for the MNB” and adds new upside risks to the inflation outlook in the coming quarters.

The combination of brisk food and oil prices, on top of the VAT hike in July, will boost inflation to 7%-8% in the second half of the year until spring next year. Inflation is likely to slow very rapidly thereafter, undershooting the 3% target in the second half of 2010, Wood and Co said.

The current spike in inflation needs not to stand in the way of a very gradual monetary easing in the near term, given that demand-led price pressures are subsiding.

“We remain of the view that a 25 bp rate cut is likely in the next two months, although a June cut is looking less likely now given continuing uncertainty stemming from the ... Latvian lat and potential contagion on the HUF from that,” it added. (MTI – Econews)