February inflation data sends a clear message to the MNB

HUNGARY - In Brief 09 Mar 2019 by Istvan Racz

---

The recent uptrend of consumer inflation continued by all existing measures, and it even accelerated, in February. The direction was widely expected but the pace was not. Headline CPI-inflation was 0.6% mom, which pushed the yoy rate back up to 3.1%, following the 2.7% figures recorded in both of the previous two months. Analysts (Portfolio.hu consensus) expected only 2.9% yoy.More importantly from the policy point of view, core inflation also rose rapidly, its various measures rising to 3.1-3.6% yoy from the 3-3.3% yoy range reported in January. The MNB's favourite index, core inflation adjusted for the impact of indirect tax changes, gave a rise to 3.2% yoy, after reaching the 3% target in January. Adjusted core inflation by this index has been on the rise monotonously since last September, starting from 2.3% yoy in August 2018.If nothing else, this monthly dataset has sent a rather clear-cut message to the MNB that it needs to tighten policy. Timing is not a question any more, as acting yesterday would be already a bit too late, in our view. It seems pretty much evident that the MNB has used and is still using every opportunity to avoid policy tightening, most probably because of its strong pro-growth bias, which is a political thing. But there is a price to be paid for all that eventually, in the sense that the undisturbed build-up of inflationary expectations and pressure may require in the end more or bigger tightening action than would be necessary otherwise. In that sense, missing the March 26 rate-setting meeting, at which time the new inflation report is also to be discussed, would be highly risky, and that risk is now so obviously present that we do not expe...