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Monday, November 24, 2008

As Retail Sales Wend Their Weary Way Downhill The NBH Cuts Interest Rates By Half A Percentage Point

Hungarian retail sales continued their long running decline in September, and fell by 0.3% month on month, according to the latest calendar and seasonal adjusted data from the Central Statistics Office. On a calendar adjusted basis there was a fall of 1.6% when compared with September 2007.

Retail sales were down in 2007 by 3.0% in annual terms, following increases of 4.4% in 2006 and 5.6% in 2005. In January-September 2008 the drop is 2.0% when compared with the same period in 2007. Which means that Hungarian retail sales actually peaked on a constant prices basis in August 2006, and since that time we have been falling, with the present level now below that registered on average during 2005. I don't give too many possibilities that we will get back above the 2005 level anytime this decade, and I wouldn't even be too sure about the next one, what with declining and ageing population and everything.

Combined sales of cars, car parts and fuel were down 2.1% year on year in September following against an 8.0% drop in August.

Interest Rates Trimmed 0.5%

In a surprise move which shocked most analysts (and possibly the IMF) Hungary's central bank cut its benchmark interest rate today by 50 basis points (to 11.00%). The Central Bank Monetary Council also reduced the reserve ratio from 5% to 2% to take effect from the December 2008 reserve maintenance period.

“Today's rate cut is not only surprising, but also somewhat reckless given the significant pressure seen recently on the Hungarian forint (HUF). Note that the NBH hiked its key policy rate on October 22 by 300bp in a move to stabilise the forint."
Lars Christensen, Danske Bank

Basically Hungary's economy is currently slowing quite dramatically, with inflation also falling sharply on the back of the slowdown. It seems the NBH monetary council was split on today's decision, which was possibly a knee-jerk reaction to the slowing growth. Put cutting rates (and basically by so little) so soon after raising them so sharply (and following so closely on a major bailout package) gives the impression of having little in the way of policy coherence.

“Market reaction to the rate decision today has been limited. Implied rates were already below the policy rate, and the move should in that sense not affect forward rates. However, looking ahead, we fear that the rate cut will not only be damaging to the NBH's credibility, but will also significantly increase the risk of a weaker forint. Today's rate cut in Hungary should further increase the chances of a rate cut in the other countries of the region."

This the decision would seem to reflect serious concerns within the MPC about the growth outlook (no coincidentally the growth forecast for 2009 has been revised from a positive 2.6% to a negative range between -0.2 and -1.7%) together with excessive optimisim that the IMF package will provide a sufficient anchor for investor expectations to avoid a sharp selloff in the forint. This way of seeing things may well come to seem exceedingly premature as both the ruble and the hyrvnia are in the throes of major downward corrections, while we may be just about to see a wave of devaluations across the EU10 East European states.

Inflation Heading Towards Deflation?

Hungary's annual inflation rate fell for a third consecutive month in October, and was down to 5.1 percent from 5.7 percent in September, according to the most recent data from the Budapest-based statistics office. Consumer prices rose 0.2 percent on the month.

Falling oil and food prices are slowing inflation, which has to date exceeded the central bank's 3 percent target since August 2006.

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