Economy
INSTANT VIEW - Hungary's inflation accelerates further
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Citi, Erste.
Eszter Gárgyán, Citigroup, Budapest
Inflation rises in line with our expectations“Inflation picked up to 1.8%YoY in December from 1.1% in November, in line with our expectations but higher than consensus forecast (1.7%YoY). Oil price rebound has been the key contributor to headline inflation pick up but core components also accelerated, moving the seasonally adjusted core CPI from 1.5%YoY to 1.7%YoY, which is the highest since Aug-2014.
Core prices also moving higher
“Food prices, alcohol and durable goods and some further acceleration in service prices were the key source of the upward move in the core CPI in December. We expect another sharp jump in headline CPI in Jan-2017 to 2.2%YoY, as base effects from oil prices may be the sharpest in this month.
“Selective VAT cuts (on internet, restaurant services and some basic food items) may be partly offset the impact of excise duty hike, muting further increase in core inflation but we expect core CPI to rise further in 2017 as minimum wage hikes and strong household consumption growth leads to rising domestic inflationary pressures. We believe service price developments will be important to monitor in Jan-Feb, when usually prices are reset.
Inflation may reach the 3% target in H2 2017
“Oil prices and rising core inflation may lift inflation further in 2017. According to our expectations, headline inflation may reach the 3% target in August already, following a close to 3% mini-peak earlier in March. Our 2017 average inflation forecast of 2.7% exceeds market consensus and the central bank’s forecast (2.4%) from Dec-2016.
“While our forecasts assume further rise in oil prices, in line with our in-house commodity forecasts, we also assume that fiscal stimulus, minimum wage hikes and closing output gap will lead to build up in core inflationary pressures.
The NBH is likely to anchor short term rates at current compressed levels
“We expect the MPC to remain the most dovish central bank in the CEE and tolerate inflation rising towards the upper 4% edge of the target band. The MPC’s intention to keep short term interest rates compressed below the policy rate in an effort to support growth may be supported by ample excess HUF liquidity in the interbank system and Hungary’s large trade surplus, stabilizing the currency.
“We expect short term rates to remain at current compressed levels until at least mid-2018, while the mid-part of the curve may be exposed to the market repricing the risks of inflation exceeding the 3% policy target"
Gergely Ürmössy, Erste Bank, Budapest
“CPI inflation rate accelerated to 1.8% y/y in December vs. Bloomberg consensus of 1.7% y/y and our estimate of 1.6% y/y. Overall in 2016, headline CPI inflation rate averaged 0.4%.“Compared with our forecast, the difference was due to the fact that the actual rate of fuel price increase was faster than we expected (4.1% y/y and 6.8% m/m). Other underlying inflationary developments were in line with our forecast, as the price of food products increased by 1.3% y/y, tobacco and alcoholic beverage prices rose by 2.5% y/y, clothing edged up by 0.5% y/y, prices of durable good decreased by 0.5% y/y and prices of services went up by 1.9% y/y.
“Core inflation accelerated to 1.7% y/y in December, while average core inflation rate was 1.4% in 2016. The increasing core inflation rate indicates that there is a mild inflationary pressure prevailing within the economy, which could strengthen over the course of 2017. The prevailing upward pressure stems from the fact the fast-paced net real wage growth probably have started to translate into higher consumer prices.
“The acceleration of both headline and core inflation rates should continue in 2017, however, there are targeted VAT cuts (e.g. poultry meat, internet services, catering services, etc.) that may reduce the upward pressure on prices to some extent, while the increase of the excise duty on tobacco products, the fast-paced nominal wage increase will put upward pressure on Hungarian inflation rate. In addition, volatile commodity prices pose risks, as well.
“We revised our CPI forecast by 0.3ppt to 2.3% for 2017, due to the aforementioned risk factors. We note that the accelerating nominal wage growth bears an additional upside risk, as it may be translated into consumer price inflation to a significant extent earlier than we currently foresee it. The central bank’s 3% inflation target (mid-point) may be met in mid-2018, according to our forecast.
“We believe that the acceleration of CPI inflation should not deter the MPC from its dovish stance. The 3M policy rate will be unchanged at 0.9% by the end of 2018, and interbank interest rates should remain depressed for a prolonged period as well, in our opinion."
