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Analysts calm as prices drop

Despite a negative price path that has dominated for most of the previous year, analysts say there is no cause for serious concern about a deflationary trend.

Although Hungary’s Consumer Price Index has been negative for most of the last 12 months, analysts polled by the Budapest Business Journal say the decline is slowing, and they expect CPI to return to a positive range in the long-term, as deflationary pressure eases. For now, they say, the latest price figures provide a reason for the central bank to keep on cutting its base rate.

According to the Central Statics Office (KSH), Hungary’s CPI in March came to -0.6% in year-on-year terms, slowing from February’s y.o.y. -1%. This is in line with the predictions of emerging market analysts based in London, who estimated consumer prices would have fallen 0.5-1.1%. The estimates, unusually wide in range, depended on how much weight the analysts attribute to the disinflationary impact of the stronger forint or to the inflationary pressure of base effects.

According to CIB Bank analyst Mariann Trippon, although the “inflationary measures of March reveal an easing in deflationary pressure [...] still the economy is characterized by a powerful disinflationary environment.” Trippon added that “the annual value of core inflation, which was cleared from volatile components, stayed at 1%, and short base indices also reveal low inflation”. 

March’s CPI revealed deflationary pressures in nearly all major products, however “the pace of decline was lower than expected by analysts”, Monika Kiss, senior analyst at Equilor Investments Ltd. told the BBJ. “Generally speaking, deflation causes an increase in the real value of money and other monetary items, but periods of deflation through a complex process might lead to economic stagnation,” Kiss added.

Long-term optimism

But analysts are optimistic about the long-term outlook for CPI. “Looking ahead, inflation is expected to turn positive in the second half of the year due to the base effect, and the administered energy price cut in 2014 and the massive slide of fuel prices are not going to be repeated; it will, however, fall short of the 3% inflation target,” Zoltán Török, head of research at Raiffeisen Bank Hungary said. Török’s forecast is in line with the prediction by Kiss, who believes that

“CPI may remain in the negative range during the summer and return to positive territory as of October-November.” 

Although Trippon says inflation could stay under 0% for the following few months, she predicts a gradually improving CPI. “We do not expect deflation to be long-lasting: The run-out of government mandated household utility price reductions and the expected improving internal demand is pointing towards higher quality price standards,” she added. “However, the next couple of years would be characterized by a powerful disinflationary environment, not only in Hungary but also globally. According to our predictions, inflation in Hungary will reach the MNB [National Bank of Hungary] target of 3% in the second half of 2016.” Trippon speculated.

Kiss added “the Monetary Council expects inflation to be significantly below the 3% target over the short-term.”

Further rate cuts and easing ahead

MNB’s deputy governor Ádám Balog last week said that monetary easing would take place in several steps, chiefly determined by the inflationary outlook, and he added that the base rate could bottom out below 1.5% (i.e. lower than that of Poland).

The analysts queried by the BBJ all expect the central bank to continue the easing cycle that it re-launched on March 24. Török said that Raiffeisen Research forecast was for key interest rate to reach its lowest point at 1.5% in June.

“There is ground for further easing, but the communicational ‘offense’ can be understood as a verbal intervention against the weakening forint,” Trippon said, adding “it has been clear that MNB does not only tolerate but, within certain limits, motivates the weakening of the forint, which is both good for reaching export competitiveness and helps reach the inflationary target, therefore despite the restarted easing cycle the currently strong forint under 300 to the euro is unfavorable for decision makers.”

Kiss believes “Risks pointing in the direction of looser monetary policy have increased; and in accordance with that the Monetary Council lowered the key interest rate to 1.95% on March 24.” She predicts that “the long-lasting inflation below target, the strengthening of the forint and the supportive external market environment altogether give enough reason for the [rate setting] Monetary Council to continue its easing cycle.”

However, “the end of the new cycle is chiefly dependent on market processes”, according to Trippon. She added: “Of external factors, geopolitical processes and the [U.S.] Federal Reserve’s monetary policy could risk a ‘higher low point’, but if global risk appetite does not weaken significantly and, parallel to this, the forint is stuck at a strong level, the following months could bring rate cuts bigger than 15 basis points, and it is also possible that the easing cycle will end below the target rate of 1.5%.”