Hungary’s consumer inflation is set to accelerate further this year on the back of new tax and excise hikes but the central bank will continue to focus on external risks in its rates decisions, London-based emerging markets analysts said after higher-than-expected CPI figures for June had been published on Wednesday.
Headline year-on-year inflation rose 5.6pc last month, compared to an Econews poll among London-based analysts whose forecasts ranged from 5.3pc to 5.5pc.
Emerging markets economists at JP Morgan said after Wednesday’s data release that they “would not draw too far-reaching conclusions” from the worse-than-expected inflation data as part of the rise was caused by supply shocks rather than demand factors.
Nonetheless, the June CPI “is likely to have surprised the NBH on the high side”. Second-quarter CPI exceeded the staff’s freshly published inflation projection by a tenth, while the ex-tax rate is tracking two tenths higher.
“We expect inflation to rise further to 5.8-6.0pc in coming months as the new telecoms tax and a further excise tax hike on tobacco come into effect”.
Inflation is likely to decline to around 5.3pc by year-end and should fall to around 3.5pc on average next year.
Policy-wise, “we maintain our view the MPC will wait to see a sustained decline in risk premia on HUF assets before cutting rates, which is unlikely to materialize before an IMF/EU deal is concluded … Our base case is for the first cut to be delivered in October, with a cumulative 100bp in easing”.
“We see the policy rate falling to 6.50pc by end-2012 and 6.00pc by end-2013″.
Yet, “we believe that the government’s recent policy decisions have increased the risk that that the start of rate cuts will be delayed” as the IMF/EU talks could be more prolonged than the market anticipates. The government’s decision to apply the new financial transactions to central bank and treasury transactions is “highly controversial” and the IMF will want the authorities to find alternative revenue sources, JP Morgan’s analysts said.
Emerging markets economists at Goldman Sachs said they continue to think that, in the near term, inflation prints “will be of secondary importance to monetary policy”.
“In our view, the MPC will continue to focus primarily on the risks to the forint and external financing of Hungary, and try to keep monetary conditions tight as long as the risk perception related to the Hungarian economy remains elevated … We think the MPC will cut rates only once the new financing agreement with the IMF/EU is in place”.
However, “we think discussions will not be easy and the deal will be reached – this is still our baseline – only in mid- to late Q4, leaving the NBH with only one or two opportunities to cut this year, to 6.5pc, and more in 2013, to 5.5pc”.