August inflation unsurprisingly rose a bit further, explaining yesterday's MNB move

HUNGARY - In Brief 09 Sep 2020 by Istvan Racz

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CPI-inflation was reported at 0% mom, 3.9% yoy, the latter slightly up from 3.8% in July and in line with analyst expectation. Core inflation also went up moderately, to 4.7% yoy from the previous 4.5% by the KSH's basic measure, to 4.2% yoy from 4.1% by the MNB's tax-adjusted indicator, and to 4.3% yoy from 4.2% as regards non-fuel inflation. The monthly inflation rate was low on a seasonal basis but not quite as low as in August 2019. The difference can be blamed on a combination of factors, including non-seasonal food, beverages, clothing and services. These items all proved to be a bit stronger this year, whereas fuel prices were pulling the headline rate moderately downwards this time.Needless to say that the main core inflation indexes now substantially exceed the MNB's tolerance ceiling, and so their further increase is just awkward from the policy point of view even if essentially no one expected a materially better monthly outcome for August. Of course, the MNB is not in the mood to tighten, given the existing weak economy, but something still had to be done in the direction of greater tightness. This need explains to a great extent the MNB's yesterday announcement of (maximum) two-week reverse FX swaps (the MNB selling FX to banks for HUF), which effectively stopped the forint's weakening trend at EURHUF 360. For sure, it may be argued that the introduction of reverse FX swaps as a new tool is just a logical step anyway in a system where banks are awash with HUF liquidity, but when exactly the announcement on them was made still matters.The official explanation for the reverse FX swap tool was the intention to smooth out (= reduce the volatility of) swap mark...