Hungary - Economic update March 2019
Solid outlook for 2019
Contrary to the Czech economy, the Hungarian economy started 2019
off on a surprisingly positive note. This is the message conveyed by
the hard data for retail sales and industrial production. Production
(in working-day adjusted terms) rose by 5% yoy in January. Hence, in
contrast to, for instance, the Czech or German economies, the
Hungarian industry has not yet experienced a significant deceleration.
The development of business sentiment in manufacturing (PMI) supports
the same conclusion, as the Hungarian PMI has not followed the bearish
trend visible in the rest of the region.
Inflation surprises on the upside
The Hungarian consumer price index delivered a surprise, with inflation accelerating from 2.7% yoy in January to 3.1% yoy in February, versus a market expectation of 2.9% yoy. Core inflation also jumped substantially, from 3.2% yoy in January to 3.5% yoy in February, which is the highest read since end-2013 (figure HU1).
Figure HU1 – Inflation surprising on the upside (consumer price index, % change year-on-year)
Almost all subgroups showed an acceleration in price increases, but the most notable acceleration was in food products. Unprocessed food prices increased by 2.6% mom, mainly due to a jump in potatoes and other vegetable prices, while processed food prices also rose by 1.1% mom. With regard to tradeable goods, there was some price moderation in February (seasonal effect), but it was smaller than in previous years. Meanwhile the market services prices maintained their increasing trend. The latter two product groups confirmed our view that strong domestic consumption may push inflation up this year. On the cost side, fast wage increases also contribute to inflationary pressures.
There is a notable difference between the January and February increases in core inflation: the former was driven more by the excise duty hike on tobacco, while the latter by pure market reasons. As such, it will be interesting to see how the Central Bank of Hungary (MNB) judges the current figure. Core inflation excluding indirect tax changes went up from 3% yoy in January to 3.2% yoy in February (a new peak since 2008).
Central Bank of Hungary will not speed up monetary normalisation
The MNB Monetary Council finds itself now in a difficult situation. On the one hand, strong Hungarian economic growth and above-target inflation calls for monetary tightening, while on the other, the deteriorating international environment - with slowing European and Chinese growth and lower inflation in the euro area - calls for loose monetary conditions. Additionally, the MNB also wants to boost lending, which requires low interest rates as well. We still think that Hungarian economic policy is too loose, as both fiscal and monetary policy supports the economy in an excessive way, which increases the risk of overheating. Despite this risk, we still don’t expect a fast monetary policy adjustment. Headline inflation may peak in March around 3.3% yoy, followed by a gradual moderation to 2.5% yoy till mid-summer, again followed by another turn. As such, we might see headline inflation at 3.5% yoy in December of this year.
This inflation orbit suggests that the MNB may rather smoothly adjust its monetary policy till the summer, so we maintain our view that the average amount of liquidity to be crowded-out will be maintained around HUF 400 billion in Q2 2019 - it doesn’t really matter whether it is HUF 300 billion or HUF 600 billion, as in both cases it pushes the internal banking rate close to the low end of the interest rate corridor. Furthermore, we expect the overnight deposit rate to be increased from -0.15% to 0% around the beginning of summer, and to end the year around 0.50%. The average liquidity to be crowded-out might be decreased to zero in the autumn, which might push up the very short end of the curve.