A few words on GDP, EURHUF, vaccination and central bank policy

HUNGARY - In Brief 02 Mar 2021 by Istvan Racz

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KSH (the Statistical Office) has just revised its GDP figures for Q4 2020. The revision has taken a distinct upwardly direction: in real terms and on sda basis, GDP rose by 1.4% qoq and fell by 4.1% yoy in Q4, as opposed to the preliminary +1.1% yoy, -4.3% yoy figures.Now that the economy seems to be somewhat stronger than previously estimated, the question could be raised if some monetary tightening could be justified or, even more, if it should be expected to happen, especially after the forint has fallen back to the EURHUF 360-365 range in recent days, roughly 2% weaker than in previous weeks. Our answer to this question is a clear NO. First, the MNB normally refrains from reacting to externally driven moderate exchange rate movements instantly. In other words, it prefers not to work directly against the market, which makes much sense, of course.The other important circumstance is that the MNB's recently stated preference for increasing exchange rate stability, with a view to taming core inflation, does not seem to be threatened by the most recent weakening of the forint. The important thing to look at here is the yoy change by the monthly average EURHUF rates, as that is the one built into domestic inflation through a very high ratio of exports and imports to the domestic economy. Should the March average EURHUF rate end up at 365, i.e. somewhat weaker for the forint's perspective than it is today, it would imply 5.7% EUR appreciation on yoy basis, down from 6.1% yoy in February, 7.4% yoy in January and 7.9% in the whole of 2020. That means the objective to slow down HUF depreciation would be still met.Consequently, we do not expect the MNB to easily get nervous ab...