Moderating Hungarian deflation unlikely to affect monetary policy

Moderating Hungarian deflation unlikely to affect monetary policy
By bne IntelliNews July 8, 2016

Hungary’s CPI remained in negative territory in June, although the price fall was limited to 0.2% y/y, statistics office KSH reported on July 8.

Hungary slumped back into deflation for the first time in six months in March. After a swift rebound in April prices returned to deflation again in May. The majority of analysts expected another decline in June. Although CPI increased 0.2% on a monthly basis, the fall in annual terms points to a continuing lack of inflationary pressure.

That is, however, in line with the central bank’s expectations. The Magyar Nemzeti Bank has forecast the inflation rate will sit near 0% in the coming months.

Hence, a second month of deflation in a row is unlikely to push rate setters from the path they have clearly indicated. That suggests the monetary council will continue to eye the use of further unconventional tools to loosen policy. Whether the limited deflation will encourage discussion of further cuts to the benchmark in the longer term remains to be seen.

The decrease in CPI in June was mainly driven by falling fuel prices, which decreased 10.4% y/y. Food prices decreased 0.4%, within which pork prices were cut by 17.2%. Alcoholic beverages and tobacco became 1.9% more expensive, services 1.6%, consumer durables 0.7% and clothing and footwear 0.5%.

Global oil prices remain the overwhelming driver of low inflation, and are likely to continue to threaten to push Hungary's CPI again into negative territory in the coming months, analysts warn. At the same time, the MNB’s inflation forecast for 2016 has been hiked 0.2pp to 0.5%, and 0.4pp to 2.8% for next year.