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Hungary CPI spike “temporary”, GDP growth from H2, says City

The unexpected jump in consumer prices last month is likely to be temporary, and Hungary's economy is set to start growing from mid-year, London-based emerging markets analysts said after the latest set of CPI and GDP figures was released on Friday.

The year-on-year headline CPI was considerably north of expectations at 6.4%, while the economy shrank by a less-than-consensus annual rate of 4% in the Q4 2009.

Polled by Econews in London, analysts at ten major City-based investment banks and research institutions had ranged widely from 5.3% to 6% in their CPI forecasts, averaging at 5.7%, while predictions for the year-on-year GDP shrinkage varied between 4.5% and 5.1%.

After the data release, JP Morgan said that Hungary's Q4 2009 GDP “was a mixed bag”, as annual contraction eased but the economy failed to grow on sequential basis.

Weak domestic demand is still outweighing reviving exports. As weakness in domestic demand is likely to remain “we expect Hungary's economy to return to annual growth only around mid-year”, JP Morgan said. It added, however, that it expects a full-year GDP growth of 0.5%-1%.

Most foreign and local analysts expect Hungary's GDP to return to growth this year, while the government still expects a contraction of 0.3%, and on Thursday OECD predicted a GDP decline of 1% for 2010.

JP Morgan also said that given the weakness in domestic demand and a stable currency, “we expect the MNB to continue the policy of small rate cuts to 5.5% from the current 6%, despite (the) higher than expected swing in CPI in January”.

The acceleration in inflation was driven by large base effects in fuel prices and higher tobacco and food prices. Yet, an inflation reading above 6% “should be a peak, and we expect a decline to below 3% (year-on-year) by July as the VAT hike falls out of the y/y calculation”, JP Morgan said.

Christine Li, Moody's's London-based economist said that the rise in prices is expected to be temporary.

Unlike its Central European counterparts, Poland and the Czech Republic, Hungary will remain in recession until mid-year as a still-fragile financial market and fiscal restraint weigh heavily on the domestic economy, Ms Li said.

This will ensure that “inflationary pressures do not rise too fast”. Moreover, firms are unlikely to be able to pass on the rise in costs to end customers. However, this will also put pressure on profit margins and could keep unemployment high, Christine Li said.

Overall, Moody's expects MNB interest rates to fall gradually by another 75 basis points in 2010, taking the base rate to 5.25%, she added. (MTI-Econews)