MNI NBH WATCH:CPI-Core Divergence Complicates Cut Calculations
MNI (LONDON) - Hungary’s central bank will decide whether to leave key interest rates unchanged or to cut by a quarter point for a second consecutive meeting on Tuesday, but while June’s headline inflation surprised to the downside, stronger-than-expected core prices and a preference for caution may weigh against any additional easing.
NBH deputy governor Barnabas Virag said in June - when the base rate was lowered 25bps to 7.00% - that monetary policy was entering a “new phase,” characterised by “substantially smaller room for manoeuvre to lower the base rate.” (See MNI EM POLICY: NBH To Consider Slower Pace Of Cuts)
The consumer price index is expected to fluctuate close to the upper bound of the central bank's tolerance band in coming months, he added, while the decline in core inflation was seen drawing to a close in the second quarter, and it should rise “close to 5.0% by the end of the year.”
Food inflation has since fallen back to 1.1% in annual terms on the back of a 0.3% June decline. Fuel prices registered a 3.4% drop from the preceding month, and while durable goods were down just 0.1% over the same period, overall inflation surprised to the downside at 3.7%.
However annual services inflation jumped to 9.7% , with a 1.0% month-on-month increase, while the NBH’s sticky prices measure for June was unchanged at 5.6%.
That leaves the question of a July reduction in the policy rate “absolutely open”, Virag said in an interview last week, though he cautioned against overreacting to incoming data. "One or two favourable figures will not change the expected interest rate path."
Last month’s rate reduction left the base rate at the upper end of the well-signalled 6.75% to 7.00% mid-year range, though the central bank has indicated that with the inflation outlook less clear there will be no repeat of H1’s approach to forward guidance.
Policymakers will instead base their thinking on “the outlook for inflation and developments in the risk environment, based on which it will take decisions on the level of the base rate in a cautious and data-driven manner.”