Hungary - Economic update May 2019
Growth and inflation up
The strong Hungarian growth performance in Q1 (5.2% yoy) clearly led
to accelerating inflationary pressures. Hungarian headline inflation
surprised to the upside again. Recall that consumer price growth
accelerated from 3.7% yoy in March to 3.9% yoy in April (figure HU).
The seasonally adjusted core inflation remained at 3.8% yoy in April
after 7 months of acceleration, starting from 2.3% yoy in August
Figure HU – Strong Hungarian growth performance led to accelerating inflationary pressures (HICP, % change year-on-year)
The fuel price jump (6% mom) was the main reason behind the further acceleration of inflation, but higher tobacco and market service prices also boosted food inflation. Market service inflation has accelerated in every month this year, compared to the same month the previous year. Moreover, there has been a continuous acceleration over the last one and half years. The tax adjusted market service inflation reached a more-than-10-year peak at the end of April. It definitively confirms our view that the domestic components (strong domestic consumption and substantial wage hikes) are causing inflationary pressures in Hungary.
Looking ahead, headline inflation may start to moderate in the following months and may bottom out around 3.2% yoy in August and September, assuming there won’t be any further increases in the oil price. This drop will be driven by a negative base effect while underlying inflation may remain relatively elevated, meaning that core inflation will stay above the target but slightly below 4% yoy. In the last quarter of this year, headline inflation may, however jump again – possibly even above 4% yoy, also due to base effects. So, we expect to see 2019 annual average inflation around 3.4%.
The NBH’s may stay on hold in May despite higher inflation
The National Bank of Hungary (NBH) Monetary Council believed in
recent months that the slowing international environment and the low
imported inflation could cool down Hungarian inflation too. As such,
it will be interesting to see how the NBH reacts to the surprisingly
good growth figures, in particular as inflation has now reached the
upper band of the NBH’s tolerance range.
Clearly, given the combination of inflation overshooting NBH’s target, fast economic growth (driven by strong domestic consumption), the tight labour market, strong wage growth and the rapid increase in household borrowing (monthly new mortgage lending is at pre-crisis levels) implies a clear and loud call for monetary tightening. Nevertheless, despite all of these strong signals we don’t expect a rate hike from the NBH during its May rate-setting meeting. We do, however, think that the NBH will increase its O/N deposit rate by 10bps again in June, and should follow up with two additional 10bp rate hikes in both the 2nd and 3rd quarter. We also expect that HUF liquidity will decline further and the 3-month Bubor may rise to 0.4-0.5% by the end of the year.
Last but not least, it is also important to mention that the
government may issue a new retail bond, from the 1st of June, with a
higher interest rate than on currently available retail papers. This
is, in a way, a form of monetary tightening. If it succeeds in
reallocating households’ savings (for example by channelling some
deposit from banks into this new paper), this initiative can extract
some HUF liquidity from the economy, causing upward pressure on the
short end of the curve.