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Hungary Dec CPI will not stop rates easing, says City

The anticipated acceleration in Hungary's consumer inflation last month has been driven predominantly by large base effects rather than fundamental price pressures and should not stop the central bank's easing cycle, London-based emerging markets analysts said after the December CPI figures were released on Thursday.

The year-on-year headline inflation rose to 5.6% in December, the second consecutive month that has seen CPI figures accelerating. Consumer prices surprised markets on the upside in November with a higher-than-expected 5.2% year-on-year headline reading, but this followed four consecutive months of downside surprises.

Ther latest set of inflation figures is broadly in line with expectations, however. Polled by Econews prior to the release of the December data, analysts at ten major City-based investment banks and research institutions ranged from 5.5% to 5.8% in their forecasts, averaging at 5.64%.

Christine Li, London-based economist at Moody's said after the data release that despite the rise in inflation, domestic demand remains weak as private consumption and government spending have continued to fall.

Hungary's economy will remain in recession until the second half of the year “on the back of very tight fiscal policy and still high borrowing costs”. Firms are unlikely to be able to pass on the rise in costs to end-customers, ensuring that inflationary pressures “do not rise too fast going forward”, she said.

Overall, monetary policy is expected to loosen further this year as the economy “suffers from its worst recession in 17 years”. Moody's expects NBH interest rates to fall gradually by another 100 basis points in 2010, taking the base rate to 5.25%, Christine Li said.

JP Morgan's London-based analysts stressed that a large negative base effect in fuel prices pushed the year-on-year rate up last month, while underlying inflationary pressures remained muted, with both service price inflation and industrial goods price inflation declining in December.

The year-on-year rise in fuel prices alone lifted the annual CPI rate by 0.5 percentage point, they added.

“We expect inflation to peak in January as the fuel base effect lifts headline CPI inflation close to 6% ... However, base effects will start to die out from February and we expect inflation to fall to below 4% by mid-year”. And once the impact of last year's VAT hike drops out of the year-on-year index in July, inflation is likely to fall below 2.5% in the third quarter, JP Morgan said.

“There is nothing in this release” to prevent the MNB from cutting rates again this month. It is not inflation or growth but financial stability that has been the decisive factor in the pace of MNB easing. “Indeed, inflation and activity data alone would probably have justified much steeper cuts last year”.

While the case for a 50bp cut could be made in light of the recent improvement in risk appetite, “we expect the M% to continue with 25bp steps - after they switched to 25bp in December - until the elections, taking the policy rate down to 5.50% by end-March”, JP Morgan's City-based analysts said. (MTI-Econews)