Food shocks set to boost Hungary CPI even higher

Hungary’s consumer inflation is set to accelerate further on the back of continued global food price shocks, but the central bank may overlook this upward price pressure and carry out more rate cuts if the current supportive market conditions hold, London-based emerging markets analysts said after CPI figures for August had been released.The statistical office said that headline year-on-year inflation picked up to 6.0 percent last month after a 5.8 percent print in July. The August figure was broadly in line with the London consensus. Economists at 4 cast, a major London-based financial consultancy, said after the data release that CPI is set to remain under upward pressure in the coming months, partly due to the fact that the recent corn and wheat price shocks will feed through more forcefully from September. “That said, the MPC made it clear by its decision to cut rates in August that this is no impediment for monetary easing, and they are still likely to ease rates once again at their September sitting”. London-based analysts at JP Morgan said that Hungary’s inflation will likely accelerate further in September towards 6.5 percent as food inflation adds to the pressure and a number of tax hikes have yet to show up fully in the data. CPI should peak in September and then correct lower towards 5.5 percent at the end of 2012. Next year, “we expect disinflation to continue and reach 3.5 percent at year end, but to remain above the NBH target”. The main inflation risk going forward is related to the food price shock, and rising inflation along with upside risks coming from increases in global food prices are likely to push headline inflation higher and might keep it “at an uncomfortable level for the NBH”, JP Morgan said. In its last meeting the MPC indicated less focus on headline inflation, but this could change if inflation remains persistently high and impacts inflation expectations. Therefore, looking forward, MPC actions will likely remain cautious and aggressive easing should not be expected. “We maintain our base case for 75 basis points in further cuts by the first quarter of 2013, with likely one more cut before year-end (in 2012)”. The timing of cuts will remain dependent on global risk appetite and progress at the EU/IMF talks, JP Morgan’s analysts said. Economists at Goldman Sachs in London said that Tuesday’s CPI reading is likely to strengthen the opposition to further rate cuts. However, “we continue to think that near-term rate decisions will ultimately depend on the MPC’s perception of risks to the forint and government funding”. If the majority of the MPC think that the forint and bond prices can hold their current levels, they should feel comfortable enough to cut again at their September meeting. “We think the MPC will cut by (another) 50 basis points this year and bring the policy rate to 6.25 percent, but with price action determining policy decisions, the uncertainty about the next rate move is unusually high”, analysts at Goldman Sachs said.

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