CPI-inflation deeply below consensus in December 2014

HUNGARY - In Brief 14 Jan 2015 by Istvan Racz

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CPI-inflation for December 2014 is out this morning: -0.7% mom / -0.9% yoy (-0.7% yoy in November). The consensus expectation was -0.4-(-0.5%) yoy in various polls. Core inflation is down to 0.8% yoy from 1.2% in November, and our estimate of the underlying inflation rate is down very sharply, to -0.3% yoy from +0.7% yoy in November, due to a big base effect. Inflation fell primarily, but not exclusively, on fuel and food, which explained -0.4% from the mom inflation rate. All this seems to call for another base rate cut, but the situation is not that simple. The forint has fallen to EURHUF 319-320 from 314.89 at end-2014, indicating significant capital outflow, so the impact on official FX reserves is also a question, in addition to the impact on the financial stability of domestic FX debtors (mainly companies and small enterprises now). The immediate merits of a rate cut are not evident, as the MNB even has difficulties with the distribution of its interest-free loans, and in the less developed macro setup of Hungary, negative inflation is good for consumption anyway (despite generalistic theories on deflation risk suggesting otherwise). Our view is that there will not be a base rate cut (from the current 2.1%) until the global capital market sentiment (towards emerging markets in the main) has not improved markedly. (See more details on this in our new Quarterly Report, out on 12 January.)