The major downside surprise in Hungary's consumer inflation data for May has shifted the inflation profile for the second half of this year lower, widening the scope for monetary easing, but the central bank is likely to wait for a new IMF/EU deal before embarking on a rate cutting cycle, London-based emerging markets anlysts said after much lower-than-expected CPI figures for May had been released on Tuesday.
Year-on-year headline inflation rose 5.3% last month after a 5.7% print in April. Most London-based economists in an Econews survey had expected inflation to accelerate slightly in May, typically forecasting a 5.8% rise, and even those who saw CPI slowing down went only as far as predicting a 5.6% year-on-year rate.
Analysts at JP Morgan in London said after Tuesday's data release that their 2012 average CPI forecast has now moved down to 5.6% from 5.9% previously. "We expect inflation to fall further, to around 3.5% next year as the VAT hike falls out of the index, although several new taxes coming into effect in 2H/2012 will provide some offset".
After the May CPI data, 2Q/2012 inflation is tracking about two tenths below the MNB's March inflation projection, although the full-year figure should be broadly in line with their 5.6% forecast.
"We think that the benign structure of inflation ... increases the chances of MNB rate cuts this year ... We maintain our call for 100bp in cumulative cuts by end-1Q/2013".
"We still think the M% will wait to see a sustained decline in risk premia on HUF assets before cutting rates, which is unlikely to materialize before an IMF/EU deal is concluded, probably not before September-October", JP Morgan's London-based economists said.
Analysts at HSBC, a major global banking group, said the seasonality of food prices will be the key factor influencing headline inflation in the coming months.
"We assume somewhat higher month-on-month food prices inflation than in 2011 that should push the headline inflation higher to 5.5%-5.6% in the summer months". But this increase could be offset by falling fuel prices in the last quarter of the year and "we forecast CPI to decline towards 5% year-on-year by the end of 2012".
In 2013 the impact of a 2pp VAT increase this year will fade away but new taxes, including on telecommunication services, are still likely to keep the headline inflation above the 3% central bank target.
This year the monetary policy outlook will be determined by the risk premium on Hungarian assets rather than inflation, elevated by one-off factors. However, inflation path will be important for the overall room for a potential monetary stimulus next year, provided the risk premium declines, HSBC's London-based analysts said.