In January food sales dropped 2.4% year on year. Sales at hypermarkets and other general shops - which provide 91% of sales - dropped 2.3% in January. Non-food sales fell 3.5% in January year on year. Sales of medicines and drugs suffered the largest drop in January. Sales of cars and car parts - which are not included in the European statistical system as retail sales - fell 2.6%, while the volume of retail sales of fuel remained unchanged.
While sales continue to decline, the rate of decline may well now have stabilised, and we should be thankful for small mercies I suppose. On the other hand there seem to be few grounds for anticipating any imminent turnaround in the situation. So the question is really, what to do about it?
Reading around most of the analysts an interest rate hike would seem to be the preferred move, although this is hardly a textbook response to a rapid decline in domestic demand. Essentially you only have two tools to strengthen weak demand, the direct fiscal one, or the indirect monetary one via interest rate policy. Since fiscal policy as a mechanism for demand management is out both for now, and for the entire forseeable future given the structural difficulties of the deficit, we are simply left with monetray policy, which is why I think a rate hike is the last thing the real Hungarian economy actually needs at this point. On the other hand the financial component of the Hungarian economy may well need a rate hike. Hence the dilema.
One of the problems here is that inflation has been stubbornly high in Hungary, and it is hard to understand this in the light of the rapid economic slowdown and the reasonably tight monetary policy from the NBH, unles perhaps we start to think about the foreign currency personal consumption mortgage loans we have been so popular in Hungary over the last 6 months. These have been available at rates in the 6 to 7% range - ie just below the rate of inflation - and people have taken them out assuming they run no currency translation risk. A rate hike from the NBH would continue to reinforce that illusion, and hence inadvertently will serve to encourage people to get in deeper.
Policy makers will next meet on March 31 to discuss interest rates, but I don't imagine we are in for any surprises, and a quarter point hike at least seems well on the cards. Since this dynamic is, quite simply, unsustainable, the unknown question is what gets to happen next, and when.
One example of the kind of dynamic we might get into is brought to our attention in Portfolio Hungary coverage this morning of a SEB Bank report which advises people to sell forint and buy zloty, using the following argument:
Polish base rate is 5.5% at the moment which will be raised to 6.25% in three steps in the next three months. At the same time forint`s 7.5% base rate might be raised to 7.75% in April, but decreased again to 7.5 in November, as worries about inflation fade, according to SEB's expectations. Strategists of the bank are definitely pessimistic in connection with the outlook for the forint. They forecast 270 forint/euro exchange rate by the and of April and 274 by the end of June. In the end of September however forint will be at 270 again.
Leaving aside the details of the SEB forint forecast, they are obviously more or less on the right lines. There is little real justification for expecting a serious and sustained hiking process in Hungary, and it will fold under pressure - if for no ther reasons - of Hungary's own social and political dynamics. Coupled with which any easing in inflation will leave the NBH with few credible reasons to maintain such a tight monetary policy.