MNI POLICY: Inflation Rise, Fed, ECB, Add To NBH Caution

MNI ((MNI) LONDON) - MNI (LONDON) - The National Bank of Hungary will pay particular attention to the implications of higher-than-expected July inflation and a weaker currency in deciding whether to cut its base rate by another 25 basis points or to wait for more data and greater clarity on Fed and ECB thinking in September, MNI understands.

The key message from the NBH’s June and July decisions was that monetary policy has entered a new phase in which the two options will always be either to maintain interest rates at their current level, or to cut by another 25bp. (See MNI POLICY: NBH Leans Towards July Cut, Outlook Unchanged)

With July’s inflation coming in above the mid-point of the NBH’s forecast range at 4.1% year-on-year, in large part due to the end of obligatory price discounts on food, discussion on the Monetary Council is likely to discuss on whether its effect will be permanent or only temporary. The forint has also weakened since July, despite support from a weaker dollar, adding to inflationary concerns, though the Council does not focus on particular levels for the exchange rate.

While wages continue to grow fairly robustly, they are not are not expected to have a major impact on inflation in the months ahead.

At the same time recent investment data has been poor, and second quarter growth was a negative surprise. Market volatility also presents challenges for the NBH.

GUIDANCE

At present there is insufficient reason to revise guidance given in July, “for a careful and patient approach to monetary policy”, MNI understands, while market pricing for one-to-two cuts over the remainder of the year remains broadly in line with current central bank thinking. 

September’s Inflation Report and forecast are expected to offer greater clarity on the rate path for the remainder of this year. By then the Federal Reserve will likely have delivered a rate cut, with officials in Budapest set to pay close attention to how that decision is communicated and its implications for future U.S. rates policy.

Equally, how the European Central Bank responds to the Fed will have a bearing on how many rate cuts the NBH feels able to make before the end of the year.

Ultimately, while the emphasis may vary from Council member to member, maintaining financial market and exchange rate stability is seen as paramount - both from an inflationary perspective, and in maintaining the trust needed to grow the Hungarian economy.