Hungary's consumer prices increased by 0.4% y/y in December 2013, easing from a 0.9% y/y rise in the previous month, the statistics office said. The reading was below market expectation for a 0.6% y/y growth. On a monthly basis, consumer prices in the country dropped by 0.5%, deeper than the 0.1% m/m decrease in November.

The ease in annual inflation in December was largely due to the government's decision in November to cut utility prices resulting in a 17.7% y/y drop in prices of electricity, gas and other fuels.

Prices of consumer durable goods extended their downward trend, falling by 1.6% on the year, reflecting continued weak household demand. Prices of clothing and footwear saw a 1.1% y/y fall in December, slightly slower than November’s drop of 1.2% y/y.

The annual growth in food prices slowed to 0.1% in December from 0.4% the month before. Prices of alcohol beverages and tobacco products rose by 12% y/y, after a 10.6% y/y hike in November. Costs of services advanced by 3.7% y/y in December, slower that the 4% y/y increase a month earlier. Prices of motor fuels also increased by 0.9% y/y as well.

The Hungarian central bank decided on December 17 to cut the base rate by 20bps to a new historic low of 3%. The rate setters considered that further cautious easing of monetary conditions might follow, considering the outlook for inflation and the real economy and taking into account perceptions of the risks associated with the economy. They agreed that the pace of monetary easing could be slowed down. In our view, another round of 20pbs rate cut might be introduced at the January meeting.