Return of Hungarian deflation puts pressure back on central bank

By bne IntelliNews October 10, 2014

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Hungarian consumer prices fell by  0.5% on an annual basis in September - the lowest inflation rate since the fall of communism - the country's statistical agency KSH reported on October 10. The return of deflation raises the possibility that the central bank could consider a return to monetary easing.

September's drop in prices was the first deflation since the 0.3% retreat in June, a figure analysts had expected to be matched. Month-on-month, prices declined 0.2%, matching August. Economists had forecast a flat reading for the monthly change.

The Hungarian Central Statistical Office suggested that the government-mandated price cuts for utilities did most to push prices down, with household energy prices dropping 12%. also noted that the introduction of the financial transaction tax has now dropped out of the 12-month index.

Accompanied by a sharp decline in industrial production growth in August, the return of deflation  moves the focus back towards the Magyar Nemzeti Bank, which at its monthly meeting on September 23 kept rates steady for the second consecutive month. 

Following the end of a 24-month easing cycle in July, the NBH maintained its key interest rate at a record low 2.1%, citing spare capacity in the economy and an outlook of moderate inflation. The rate setters reiterated they expect to keep monetary policy "loose" for an "extended period".

However, European growth is stuttering and many EU countries are struggling to fight off deflation. With the European Central Bank mulling unconventional stimulus measures, Poland's central bank announced a surprising cut of 50 basis points to 2% on October 8. Poor inflation data could now push other regulators in the region to resume monetary easing.

Commerzbank notes that "crucially,” Hungary's CPI "dropped sharply in core terms to 1.4% from c.2.5% in prior months. This is precisely what we had been waiting for as a signal that [central bank] rhetoric may have to take a fresh dovish turn, and market rate expectations would have to be re-priced. We still need to see some weakness on the manufacturing side before rate cuts become the consensus expectation, but we think that this is coming."

Unlike other countries in the region, where food prices dropped because the Russian embargo pushed supply, Hungarian food prices rose 0.2% through the month. Yet next door, the glut of food on the market helped sink Czech inflation in September to 0.7%, as reported the previous day. 

Although that was above the Czech National Bank's forecast of 0.5%, analysts at Commerzbank still suggest pressure is also mounting on Czech rate setters. Although the CNB has held rates at virtual zero for some time, and has been intervening to suppress the crown, the analysts say it may need to do even more.

"CNB reiterated that headline CPI will rise gradually back to the 2% target by H2 2015, but this is CNB's unchanged position over the past year," they note. "We see downside risk to Czech inflation ... and the likelihood that CNB may have to tweak its monetary policy further at some point."

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