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Record-low base rate to remain for this year

After three years of practically non-existent inflation, Hungary will see a noticeable rise in consumer prices in 2017, analysts say. Meanwhile, the consensus is that the National Bank of Hungary might deploy further non-conventional tools, but no tightening cycle is expected to start any time soon.

Hungary’s macroeconomics calendar wasn’t exactly full in the second half of January. One of the most significant pieces of data was the consumer price index for last December, and the Central Statistical Office (KSH) also published inflation figures for the full year (2016) on the very same day in mid-January. 

According to the KSH, consumer prices were 1.8% up on average in December from a year earlier.

Food prices rose by 1.3% in the last month of 2016 on a year-on-year basis: within the group, sugar prices grew the most, by 16.3%, prices of seasonal food items were up 3.6%, while milk prices grew by 2.6%. During the period, pork and poultry meat prices decreased, by 8.5% and 3.6%, respectively. A higher-than-average price rise of 3.5% was recorded for other goods, such as pharmaceutical products, motor fuels, household products and recreational goods, and, within this, consumers paid 6.8% more for motor fuels. The prices of electricity, gas and other fuels remained unchanged.

In line with expectations, consumer prices rose by 0.4% on average in the full year of 2016 compared to 2015. Food prices increased by 0.7% last year, with the highest price rise (2.3%), recorded for alcoholic beverages and tobacco. The prices of services rose by 1.5%, those of consumer durables by 0.5%, and the prices of clothing and footwear by 0.4% on average. Consumers paid 2.2% less for other goods, and the prices of electricity, gas and other fuels were reduced by 0.1%. The last year when inflation was in the positive territory was 2013, when prices were up 1.7% from the previous year.

The fact that core inflation in December increased to 1.7% clearly shows inflationary pressure, however, this is way below the 3% medium-term target, Takarékbank analyst Gergely Suppan comments in a note. Increasing fuel prices caused the month-on-month 0.4% rise in the index, he emphasizes.

At the beginning of this year, several contradictory factors affect inflation: while the VAT reduction for certain goods – fresh milk, egg, poultry, internet, hospitality – pushes the index down, the base effect, together with further increasing fuel prices, livening domestic demand and higher wages, all push it up, Suppan explains, adding that higher wages are somewhat balanced with lower wage costs.

As of January, the consumer price index could rise above 2%, and could even be as high as 2.7-3% by March, due to the base effects of low fuel prices in February-March 2016. As fuel prices started to increase in April and May last year, inflation will slow down to around 2% this spring, Suppan says. He expects an annual inflation rate of 2.3% for 2017, and the index could get close to the 3% target by early 2018. Therefore, the National Bank of Hungary might deploy further non-conventional tools, but no tightening cycle is expected to start any time soon, Suppan concludes.

Indeed, Hungary’s rate setters kept the base rate unchanged at 0.9% at their latest meeting. The decision of the Monetary Council of the MNB was in line with analysts’ expectations. The council also left the interest rate corridor unchanged, with the overnight collateralized loan rate at 0.9% and the O/N central bank deposit rate at -0.05%. After the meeting, the MPC repeated its earlier statement about keeping the base rate on hold “for an extended period,” while remaining prepared to ease monetary conditions with unconventional tools if necessary.

Most analysts polled by Hungary’s news agency MTI said they did not expect the base rate to change until mid-to-late 2018. Erste Bank chief analyst Gergely Ürmössy thinks the MNB could ease monetary conditions further, believing interbank rates could fall further. He said he expected the three-month Budapest interbank (BUBOR) rate to fall below the current 0.27%, adding that the fall in nominal interest rates could lead to a rise in inflation. Ürmössy also projected an average inflation rate of 2.3% for 2017.

CIB Bank analyst Sándor Jobbágy said he expected the central bank to leave the key rate unchanged until the end of the year. He also said the use of non-conventional instruments is possible, although the MNB now has less room for maneuver on this area.

The MNB faces a double challenge, says Mónika Kiss, head analyst with Equilor Investment. On the one hand, it has to keep the base rate record low; on the other, it has to pay attention to the increasing inflationary pressure and the consequences deriving from the rising key rate of the U.S. Fed. According to Kiss, the central bank will not, therefore, modify the base rate until the end of the year, so, while inflation awakens, the rate will remain at its record low, and the MNB will only start a tightening cycle in 2018.