Hungary's return to deflation in September to raise bets on new easing cycle

By bne IntelliNews October 8, 2015

Hungarian consumer prices sank 0.4% y/y in September, ending a four-month rising streak, data from statistics office KSH showed on October 8.

The return to deflation, along with growing signs the economy is slowing, supports the central bank’s policy to keep monetary conditions loose for an extended period of time. It will also raise bets that the Magyar Nemzeti Bank could offer more easing following dovish comment at the last rate setting meeting in late September. 

The decline in September CPI was steeper than expected, with analysts looking for a drop of just 0.1%. On a monthly basis, CPI fell 0.6%.

The main drag came from fuel prices, which shrank 2.3% on the month amid a renewed fall for global crude. Food prices fell 0.2% m/m and services 0.6% m/m.

At the same time, core inflation edged up to 1.3% y/y from 1.2% y/y in August. That means policymakers may yet prove resiliant to the drop in the headline rate, suggest analysts at Capital Economics.

“Against this backdrop, rate setters may adopt a more dovish stance at this month’s meeting. Judging by the minutes of last month’s council meeting, one possibility is that the central bank may commit to some more explicit form of forward guidance," they note.

At its latest rate setting meeting on September 22, the Magyar Nemzeti Bank (MNB) remained on hold keeping rates at a record low of 1.35% and vowing to keep policy loose for an extended period of time. Rates have stayed unchanged since July, when the MNB ended its latest easing cycle.

Commenting on the September CPI data, KBC analysts suggest a new easing cycle could again be on the table. “We believe that should the MNB cut again, the base rate might be lowered to just above 1% (two 15 bps cuts may be expected)”.

Still, any move by the monetary council will also be weighed against the strength of the forint. “If the EUR/HUF pair move closer to the 300 level, a rate cut will be seriously on the table given the deeper deflation”, the analysts note.

  Sept 2015, y/y Aug 2015, y/y Sept 2015, m/m
Total -0,4 0,0 -0,6
Food 0,8 0,9 -0,2
Alcoholic beverages, tobacco 3,9 3,9 0,1
Clothing and footwear 0,0 -0,2 1,4
Consumer durable goods 1,5 1,3 -0,1
Fuel and power -2,7 -2,7 0,0
Other goods incl. motor fuels and lubricants -6,9 -4,5 -2,3
Services 2,0 1,7 -0,6
Source: KSH      

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