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Upside CPI surprise raises rate hike risk, says City

Hungary's central bank may be pressurized into more monetary tightening as early as in the current quarter after CPI data for March came in considerably north of the consensus, largely driven by processed food prices, London-based emerging markets analysts said after the latest set of inflation figures had been released on Tuesday.

Headline year-on-year inflation surged to 4.5% last month after a 4.1% reading in February. Forecasts by emerging markets economists at major London-based investment banks and financial consultancies averaged at 4.2% in an Econews poll.

Following the Tuesday data release, analysts at 4cast said that food prices were, “as usual”, the main cause of surprise “but the bad news is that it was not the unprocessed food component that caused the shock but processed food prices”.

One of the main factors the MPC highlighted to keep rates unchanged at its last rate setting meeting was the slower-than-expected transmission of the commodity price shocks to CPI – an argument that is “clearly undermined” by the current CPI release, 4cast's analysts said.

The March CPI release does not warrant an “automatic” rate hike but “there is no doubt” that the odds of seeing one more rate increase in Q2 have now significantly increased as one of the key factors the MPC singled out in support of unchanged rates “is now out of the equation”. “We believe the MPC will wait for further confirmation on a strengthening pass-through of the commodity price shock but given that the last inflation report predicted CPI dipping to 3% just at the very end of 2012, the room to leave the higher-than-expected CPI pressures unanswered seems limited,” 4cast said.

Analysts at JP Morgan in London said that Tuesday's “surprise”, coupled with the latest increase in commodity prices have prompted an upward revision to their 2011 CPI forecast. “We now see inflation averaging 4.5% this year (previously 4.2), although we still look for inflation to moderate to 3.5% next year on the back of strong base effects in food and energy.”

“We think the pass-through to core inflation in particular will result in more hawkish rhetoric at the next MPC meeting ... we maintain that the next move in policy rates will be a hike, most likely in the fourth quarter, although chances of an earlier hike have risen after today's release.”

“Our base case is for policy rates to end the year at 6.25% and rise further to 7.00% next year,” JP Morgan said.

Analysts at Barclays Capital said that core inflation remains well below the inflation target, implying domestic demand is not pushing inflation higher.

However, “the recent increases in core inflation could raise concerns at the MNB that secondary effects from higher global commodity prices will leak into domestic prices, raising the probability of a rate hike later this year ... as a stronger currency may be required to keep inflation under control, we consider a rate hike later this year as a possible scenario,” Barclays Capital said.