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Friday, April 11, 2008

Hungary Inflation March 2008

Hungary's inflation rate remained at more than twice the central bank's target in March, keeping pressure on policy makers to raise interest rates further. The inflation rate fell to 6.7 percent from 6.9 percent in February, the third consecutive monthly decline, the Budapest- based statistics office said today. The figure compares with a 6.8 percent median estimate of 19 economists in a Bloomberg survey. Consumer prices rose 0.6 percent in a month.

Seasonally adjusted core inflation came to 5.3% year on year, unchanged from Feb, the Central Statistics Office (KSH) has reported on Friday. The month on month rise was up by 0.5% from a 0.4% rise in Feb. The short-based core-inflation figure, closely watched by the central bank, also shows hardly any reduction from February. The quarterly annualised index remained around 6%, at more or less the same level we have seen in the past six months. Taking a slightly more optimistic approach Portfolio Hungary say it is good news that for the first time in a long time the indicator went below 6% (to 5.9%).

Hungarian inflation has thus now exceeded the central bank's 3 percent target since August 2006. Monetary policy makers last month responded by raising interest rates for the first time in 17 months and may now come under pressure to lift borrowing costs again to retain their credibility and to sustain the forint. After all it was only a couple of days ago that Hungarian central bank policy maker Gabor Oblath was saying the bank raised interest rates more than expected last month to signal its commitment to slowing inflation. Perhaps it is going to be pushed to give yet another signal, certainly forward looking yields suggest that they may be.

Meantime Morgan Stanley this morning lowered its rating on Hungarian markets to ‘Equal-weight' from ‘Overweight', citing rising political risks as the reason.


Tones said...

Hi - do we know what is driving inflation? I can't see that Hungarians are out there spending up big on plasma screen TVs and expensive dinners. Presumably a lot of Hungarians have Swiss Franc denominated loans so does a rise in interest rates by he Hungarian National Bank have as strong an effect as it might hope?

Edward Hugh said...

Hi Tones,

Interesting points both of them.

"do we know what is driving inflation?"

we don't exactly, but you are right that it isn't demand pull inflation that's for sure, look at the retail sales and construction data, for eg.

What we do have though are rigidities in the labour market, and real wages are now not falling as they were, which is producing some level of "pass through" effect. People are taking early retirement post 55 basically instead of going out and starting a second career, as the Japanese, Germans or Italians are increasingly having to do. (I emntion these three, since they are the leading ageing societies in the developed world, and I think what is going on in Hungary has something to do with "premature" population ageing, given that Hungarian male life expectancy is about 10 years lower than the three previously mentioned countries, so the onset of all the problems comes much earlier.

So while unemployment is rising, it isn't rising anything like as fast as jobs are being shed, and hence wages, for the time being are holding up.

So while there are food and fuel price rises, core inflation is still way to high for comfort.

It isn't that I am advocating cutting wages just for the fun of it, but I don't see how you can run this inflation, and keep the forint where it is without then having big wage deflation to restore competitiveness. So it is just that this process isn't working at present, and the interesting question is why.

"so does a rise in interest rates by he Hungarian National Bank have as strong an effect as it might hope?"

I think raising rates at the NBH hits were it hurts, on government spending via the extra interest charges they have to pay, and on small and new businesses. But it probably doesn't affect domestic consumption anything like as much as they would like, since people, as you suggest, simply take out CHF refinance mortgages for current consumption purposes.

In this sense the NBH no longer has normal control of monetary policy. Worse, they are probably being driven to keep the rates up to avoid a large scale exit of external funds. Hungary is currently caught in something of a trap.