Hungarian core inflation to remain above 3 pct in months ahead, NBH to start monetary tightening in April-May

Hungarian consumer price inflation for the month of January was released earlier this week. The year-on-year print came in line with market expectations at 2.7 percent. However, the core inflation rose to 3.2 percent year-on-year from December’s 2.8 percent. The fuel price holds back the inflation just like in every month since October. The food price rise was also lower in January on a year-on-year basis, owing to milk and milk products price decline.

The rise in core inflation was driven by market services and durable goods price rise. These two segments of products are mainly reflecting the price pressure coming from the rising domestic consumption. Moreover, the former one is also influenced more aggressively by the fast wage rise.

The National Bank’s own calculated core figures were rising as well and all of them reached the 3 percent year-on-year level. It implies that the Hungarian underlying inflation has reached the inflation target of 3 percent; however, it does not signify automatically that the central bank starts monetary tightening, noted KBC Market Research in a report.

“We expect that the core inflation may remain above 3 percent in the coming months and also the headline CPI may move also above that level. The NBH may wait for this figure first as they emphasized in their last statement that they need more figures to confirm that the inflation target has been reached on a sustainable manner”, said KBC Market Research.

The NBH is expected to begin some monetary tightening in April-May time, starting to decrease slightly the stock of foreign currency swaps, but the real tightening might be started only in the second half of 2019, when they might begin to hike the overnight deposit rate from the current level of -15bp.

“We maintain our expectation that the very short end of the curve my move up by roughly 90bp till the end of the year, thanks to the monetary tightening”, added KBC Market Research.