Core Inflation on the Rise, all Eyes on Rate-setters

    inflation

    With the latest inflation data having been released by the Central Statistical Office (KSH), we could see the start of a tightening cycle as early as in March, some analysts say. Others, however, argue that the Monetary Council might consider a later start, as headline inflation is below the central bank’s target. Core inflation, on the other hand, jumped to 3.2%, a surprise to analysts.

    Consumer prices were 2.7% higher on average in January than a year earlier, and basically remained flat from the previous month. Tobacco, alcoholic drinks, as well as food, were significantly more expensive in the first month of the year than a year earlier. The sharpest rise was in the price of tobacco products, with a 9.6% year-on-year increase.

    The biggest surprise in the data lies in the core inflation data: that figure jumped to 3.2% in January, up from 2.8% in December.
    Core inflation exceeded the mid-term inflation target of the National Bank of Hungary (MNB) of 3% for the first time in five years. Tax-adjusted core inflation, the central bank’s very own main core index, rose to 3% from December’s 2.9%.

    After the latest inflation data was released, expectations that the MNB would start a tightening cycle soon were revived. Such expectations seem quite well-grounded, as just about a month ago, MNB deputy governor Márton Nagy claimed that the central bank could make a U-turn in its monetary policy if the core inflation measure reached or exceeded 3%.

    Cut in Liquidity?

    While most analysts still expect the central bank to maintain its key rate at the record low level of 0.9% thorough the year, some think that the rise in the core inflation could soon lead to a cut in forint liquidity released by the MNB into interbank markets via its FX swap facility and an increase in the short-term BUBOR rates.

    According to analysts at Bank of America-Merrill Lynch, the MNB will start a tightening cycle gradually, as it does not want to fuel a significant strengthening of the forint against the euro. As they put it, Hungary’s central bank is “not comfortable in periods when the forint strengthens below 310 against the euro, and at around 305 HUF/euro level it is likely to act pro-actively”.

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