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Soft May CPI no reason for early rates easing, says City

Hungary's latest consumer inflation figures, considerably south of the consensus, are unlikely to trigger short-term rate cuts by the central bank as core pressures and household balance sheet risks persist, London-based analysts said after a much softer-than-expected set of CPI data for May had been released on Wednesday.

Headline annual inflation rose by 3.9% last month. Forecasts by City-based analysts in an Econews poll ranged from 4.2% to 4.5%, averaging at 4.4%.

After the data release, emerging markets analysts at Barclays Capital said that Wednesday's CPI print "could fuel the debate over whether the central bank MNB may implement rate cuts later this year, given that domestic demand remains weak, creating limited core inflation pressures".

"We remain cautious in this regard (as) the Monetary Council, with its new members, does not seem to have reduced its concern about inflation and its language has remained quite conservative".

Moreover, Hungary's balance sheets remain exposed to FX risk, while at the same time the effectiveness of the interest rate channel is likely quite limited. This implies that the NBH is unlikely "to undertake the experiment of cutting rates", risking driving HUF weaker and creating unfavourable balance sheet effects for households.

Hence, "we continue to believe the chance for rate cuts in Hungary are rather small". However, good inflation prints do mean that "we could face a very extended period of unchanged rates in a world where other EMs (emerging market central banks) are hiking", Barclays Capital said.

In a separate comment, analysts at JP Morgan in London said that "the May data surprise" has improved inflation outlook "a bit". "We expect reacceleration in CPI in September but a peak at 5% this year appears now unlikely".

JP Morgan's economists had said in their previous forecasts they saw Hungary's headline year-on-year inflation peak at 5% in September.

After Wednesday's data release, they said they expect inflation to slow after September but to remain above 3% target during next year.

"We remain of the view that the next move in the policy rate is more likely to be a hike than a cut and we expect a 25bp hike in 4Q11". The key reasons are outlook for gradually rising core inflation, the forint failing to offset any cost shock, and also rising rates in EMU and CEE, they added.

Analysts at Goldman Sachs said that "despite this downside surprise", for now they maintain their view that the NBH will keep rates on hold until year-end, given continuing financial imbalances and the fundamental depreciation pressure on the HUF. However, "we now see higher risk that the MPC may cut policy rates earlier if inflation decreases further in the following months, particularly if we see moderating core inflation and softer growth prints, a reflection of a worsening global outlook".