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Monday, February 23, 2009

Hungary's Central Bank Puts Interest Rate Reductions On Hold

The Hungarian central bank kept its benchmark interest rate unchanged today following four cuts in last three months. The principle reason for the standstill was the growing problems associated with the forint’s decline, which outweighed concerns about rising unemployment and slowing growth. The Budapest-based Magyar Nemzeti Bank, led by President Andras Simor, left the two-week deposit rate at 9.5 percent. Hungary raised rates dramatically in October in an attempt to defend the forint and while the government sought international financial aid to contain default fears.

This was no easy decision since the government already expects the economy to shrink by 3.5 percent this year and as inflation falls real interest rates rise, which means the bank is tightening monetary policy into the crisis even as the government reduces spending in order to address long standing fiscal deficit concerns. The bank now expects the inflation rate to fall to between 3.1 percent and 3.4 percent this year and to between 1.5 percent and 1.9 percent in 2010 from 6.1 percent last year. Today's decision make it likely the economy will now contract more than anticipated, and a 5% contaction is now a fair benchmark to work from, in which case the government will once more need to make a fiscal adjustment or risk a higher than anticipated deficit. There is no easy decision here, and the Hungarian economy is truly between a rock and a hard place. The forint has lost around 25% over the last six months, and dropped to a record low of 309.71 on February 17.

Wages Hold More Or Less Steady

Average earnings in Hungary rose at rates which were only just above the inflation rate in December, with average gross earnings rising by 4.6%, just 1.1% above the rate of inflation, but if we think of the real value of those wages in euro, rather than in forint, terms, then we will see that since the value of the forint was very little changed year on year in December, very little progress has actually been made in restoring competitiveness to Hungary's industrial sector.

So keeping inflation in check following the recent sharp devaluation could be one of the factors in the minds of the central bankers at this point.

Industrial Output Falls Sharply In December

Hungary's industrial output plummeted by 15.1% month on month in December, according to the latest data from the Central Statistics Office (KSH). In annual terms output fell by 23.3% according to working day adjusted figures. The detailed data make the reasons for the dramatic fall in output clear enough - the export-oriented component of Hungary's manufacturing industry came to a screeching halt in the last weeks of 2008.

A month-on-month decline on this scale is unprecedented in the history of Hungary's industrial statistics, this is the largest drop ever recorded. For 2008 as a whole, industrial output dropped 1.1% . Hungary's industrial production has now fallen back about four years and it levels attained around the start of 2005.

Hungary's industrial sector has been slowing since the start of 2008, and the January data are probably even worse, given the gas crisis associated with the Ukrainian-Russian pricing dispute which caused substantial production halts.

And the January number does indeed looks likely to be even worse, since Hungary's manufacturing purchasing manager index (PMI) fell once again to a all-time low of 38.6 in January, down from 40.8 in December, according to the Hungarian Association of Logistics, Purchasing and Inventory Management. Any PMI index figure above 50 indicates expansion while a figure below 50 shows contraction in economic activity. The index hasd been above the critical 50 mark for more than three years before it dropped below (to 42.6) in October last year.

The January figure is the lowest recorded since September 1995 and is a further sharp drop from December. The last time the January index was below 50 was in 2005 (48.5) and then in 1997 (49.1), but these contraction were much softer.

Construction Stable, But At A Very Low Level

Hungary's construction industry activity was up by 5.5% year on year in December 2008, following a 2.7% rise in November, according to the most recent data from the Central Statistics Office. According to data adjusted for working days, the increase was 3.2%. There was a 0.6% month-on-month rise in output in Deecember, following a 1.2% growth in November.

The stock of new orders in 2008 was down 11.8% for construction as a whole, with a 35.4% year on year contraction for building orders and a 25.6% growth for civil engineering ones.

Retail Sales Continue To Slide In December

Hungarian retail sales fell by 0.8% month on month in December, as compared with a 0.4% drop in November, according to calendar and seasonal adjusted data from the Central Statistics Office. According to calendar data there was a fall of 3.9% over December 2008, as compared with a 2.0% annual decline in November.

Retail sale of cars and car parts plunged by 19.7% year on year in December, following a 21.3% decrease in the previous month. For 2008 there was a decrease of 7.8% over 2007.

According to a Eurostat first estimate – based on seasonally and calendar adjusted data –, retail sales in the European Union continued to decline in December 2008. The rate of decline was 0.8% on average in the 27 member states of the European Union and 1.6% in the Eurozone compared December 2007. The average volume of retail index for 2008, compared to 2007, increased by 0.1 in the EU27 but it fell by 1.4 in the euro area. In Hungary the retail index dropped from 139.9 in 2007 to 136.8 in 2008, or by 2.2%.

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