Are you sure?

Next MNB rates move more likely up than down after April CPI

The next move by Hungary's central bank is more likely to be a rate hike than a cut after the latest set of CPI data that shows a persistent external pressure, London-based emerging markets analysts said after the figures for April had been released on Wednesday.

The headline rate of consumer inflation accelerated to 4.7% year-on-year last month after a 4.5% reading in March. Forecasts in an Econews poll conducted in the City prior to the data release averaged at 4.61%.

Analysts at Morgan Stanley in London said after the April CPI numbers were published that the rise in processed food is showing “clear signs of spillovers” from external shocks into domestic prices. “True, market services prices, a key gauge of demand pressures, look contained, but the overall breakdown suggests to us that the inflation threat has not diminished”.

The minutes of MNB's April rate decision showed a unanimous vote for unchanged rates, but “also revealed a clear concern among policymakers that spillover threats are real”.

Morgan Stanley said it thinks that the MNB projection for disinflation in the coming quarters is correct in terms of direction, but it is “too ambitious” in terms of scope for inflation to fall.

“We forecast inflation to average at 4.6% this year and 3.9% in 2012 ... we estimate that already in Q2 inflation is tracking about 0.4 pp above the MNB projection”.

Morgan Stanley said it continues to believe that the next move in rates is more likely to be up than down, though any hikes will probably be delayed until late this year.

On a similar note, JP Morgan's London-based emerging markets economists said after the data release that they do not think the 3% inflation target can be met next year unless monetary conditions tighten further. “We maintain that the next move in policy rates is more likely to be up than down ... Our base case is for a 25 bp rate hike in Q4 11, although the MNB might keep rates on hold through year-end if domestic demand remains weak”.

JP Morgan said its forecast is for inflation to peak in the third quarter and to average at 4.5% this year. “Next year we look for inflation to fall to around 3.5%, but risks remain skewed to the upside, in our view”.

Strong base effects this year will work to lower 2012 inflation to the extent that the current inflation rise is driven by external shocks and there are no signs of demand pull inflation. “But there is no getting around the fact that 2011 inflation is tracking 0.5 percentage point above the MNB’s latest projection”, JP Morgan's analysts said.