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One more rate cut possible, says City after CPI release

Hungary's easing cycle will likely have run its course for this year after one more rate cut, with the MNB seen taking a breather until the current market turmoil over Greece's debt worries abates, London-based emerging markets analysts said after a somewhat north-of-the-consensus set of CPI data for April had been released.

Year-on-year consumer inflation slowed to 5.7% last month after a 5.9% reading in March. London-based analysts polled by Econews before the data release averaged at 5.58% in their forecasts.

Analysts at JP Morgan said after the figures were published that they “continue to look for a steady decline” in inflation through the summer months, with a trough of 3.0-3.2% year-on-year in July-August, followed by a move back up to around 3.8% by year-end.

The recent weakening of the HUF is likely to have “some impact”, mainly on the fuel component. “We do not share the MNB's view that inflation will significantly undershoot the 3% target next year ... our 2011 CPI forecast stands at 3.2% or nearly 1 percentage point above the MNB's forecast”.

While this would still be close to target, “we do not believe the inflation outlook calls for further significant monetary easing”. JP Morgan's analysts said their rate call remains for one more 25bp rate cut, most likely to be delivered in the third quarter. Near-term, “we believe the MNB is likely to pause due to the recent rise in financial market volatility”.

Christine Li, London-based economist at Moody's, also said that the central bank will likely halt interest rate cuts until the second half of the year due to volatility in financial markets as a result of the Greek debt crisis.

The large negative base effect from the fall in commodity prices in the second half of 2008 has faded. Nevertheless, Hungary's consumer prices will continue to ease during the second half of the year after the impact of last year's VAT hike drops out of the index, but will remain above the target for 2010. Therefore, Moody's expects MNB to cut its interest rates once more this year, by 25 basis points, taking the base rate to 5%, Christine Li said. (MTI –Econews)