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Hungary CPI yet to peak, monetary response uncertain, City says

Hungary's consumer price inflation is set to shift to a considerably higher gear, hitting up to 9% in the next few months.

London-based emerging markets analysts said after the 6.5% 12-month headline CPI figure for December, somewhat south of the 6.7% London consensus, was released on Tuesday, but they voiced conflicting views on how the NBH might respond. Goldman Sachs said in its comment that the inflation peak is still ahead: the January figure is „likely to show a sizeable jump to around 8% and we expect the headline figure to reach around 9% year-on-year in March”, driven by regulated price increases. The NBH's main focus will be whether higher headline inflation will result in higher wage settlements at the beginning of the year. Goldman said it is forecasting one more rate hike in the first quarter to 8.25%, „with some risk of it not materializing”, while the market is already pricing in some probability of a rate cut in the next few months.

Dresdner Kleinwort said that better-than-anticipated headline inflation strengthens the case for maintaining interest rates unchanged at 8% in the near term. Core inflation has picked up rapidly in recent months and the December increase was greater than anticipated. However, it is difficult to disentangle how much of this rise is due to the impact of the fiscal tightening and how much it reflects a change in inflation expectations, Dresdner said. As a result, „we suspect the MPC will give more weight to wage developments than core inflation in the coming months”. Furthermore, monetary policy affects the economy with a 9-12 months lag, so raising the cost of capital now would hit domestic demand essentially by the time spending should have reached a trough anyway. As against that, fluctuations in the exchange rate pass through to the CPI more rapidly and impact domestic demand severely due to the strong increase in foreign-denominated debt. All in all, „we maintain the view that the MPC will only tighten monetary policy if the forint were to come under severe pressure again in the near term”, Dresdner said.

Michal Dybula, Central European strategist at BNP Paribas, told Econews, however, that he does expect downward pressures on the forint to become prevalent in the next few months. Asked whether he is holding on to his long-standing forecast of another bout of monetary tightening that would bring NBH's base rate to 8.75% as early as in the Q1 of 2007, he said „we are looking for a weaker forint rate within the next couple of months, largely driven by a less supportive environment for emerging markets”. „We saw some of the weakening pressure in the first week of January, but in our assessment this was just the beginning of a bigger correction which is yet to materialize in due time, once we see EUR/HUF trading above 260, the central bank will have to pull the trigger”, Dybula said. (Mti-Eco)