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Hungary CPI “no worry” for MNB, says City

Hungary's September CPI print, a tad south of consensus but up on the previous month, should not scare the MNB into a rate hike as a stronger forint and lower risk premia have improved the inflation outlook, London-based emerging markets analysts said after the CPI data release on Tuesday.

The year-on-year headline figure rose to 3.8% last month from 3.7% in August. Polled by Econews prior to the release, London-based investment analysts averaged at 3.85% in their forecasts that ranged widely from 3.5% to 4.2%.

4cast, a major London-based economic consultancy that was top of the forecast range with a 4.2% CPI prediction for September, said after the actual figures were published that although it expected to see faster price growth primarily on the back of rising food prices, in fact raw food prices turned out to be the main cooling factor as price effects from the summer draughts in Russia and a global rise in corn and meat prices have not yet fed through.

“We believe that based on the current CPI ... the MPC has no worries but there are a number of risk factors which will keep the tightening debate alive”. At this juncture, however, the MPC would need much more evidence in order to act swiftly by hiking the interest rate before the end of the year. For now, “we see further scope for maintaining the base rate at the current 5.25%, especially if the recent decline in risk premium in FX and bond markets turns out to be sustainable in upcoming months”, 4cast said.

JP Morgan said that the impact of food prices on headline inflation in recent months has been “more modest than we expected”. Following Tuesday's release, it said it had revised down its year-end CPI forecast to 4.2% year-on-year from 4.4% and if “food prices continue to surprise on the downside it is possible that inflation will remain below 4% at year-end”.

“Cost-push factors are still likely to keep inflation above the central bank's target next year - we forecast annual average CPI of 3.5% -, although a decline close to 3% is likely over the summer” of 2011, JP Morgan added.

Given the uncertain market environment and cost-push factors affecting the inflation outlook, “we remain comfortable with our view of no MNB rate hikes this year”. However, the bar for the MNB to resume its easing cycle “is quite high at the moment” and would necessitate, among other things, a stronger forint – EUR/HUF around 265 – on a sustained basis. “The next MNB move in our forecast is a rate hike in the second half of next year”, JP Morgan said.

Morgan Stanley said that Tuesday's release is “quite a benign reading overall” for the MPC, although base effects should drive inflation up to 4.3% year-on-year in December 2010.

The forint is now around 4% stronger and the oil futures are around 3%-4% lower than assumed in the Hungarian central bank's August inflation report. In isolation, these two factors would probably be enough to push the CPI profile to or below target again, though other variables, including international food prices, have changed the other way. “But net-net, the HUF move has certainly improved the medium-term CPI picture”, Morgan Stanley said. (MTI-Econews)