Growth is slowing down markedly, partial deregulation of retail gas and electricity prices to have a greater impact than expected

HUNGARY - In Brief 28 Jul 2022 by Istvan Racz

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In addition to the fact that the 1-week deposit rate was indeed raised by 100 bps, to 10.75%, at today's tender, which is absolutely no surprise after the Monetary Council's decision of two days ago, we feel it is appropriate to report two important details from MNB vice governor Virág's online presentation given right after the Council's meeting on Tuesday. First, Mr. Virág said the MNB expects the partial deregulation of domestic retail gas and electricity prices, which is to be implemented from August 1, to add 3%-points to the yoy headline CPI-inflation rate for one year starting from August. This is significantly higher than the 1.1%-point we took into account in our latest forecast (see our July report of July 22). Mr. Virág did not go into details on what European gas price the MNB assumed or what percentage of retail consumption they expected to be affected by the measure. But from the Bank's estimate it seems they assumed some 10-15% of total retail consumption to be affected - this is the part on which service providers will collect some twice as much as the current fixed price for electricity and some seven times as much for gas. CPI-inflation was 11.7% yoy in June. For July, the Bank expects it to rise to 13-14% yoy. Their new estimate on gas/electricity prices should put the August inflation rate to 16-17% yoy. Using this number as an input, we now see inflation to peak at 19% in January 2023, although it is evidently very difficult to give any relevant forecast on this, in view of how fast everything is moving in these days. 19% yoy inflation would go with a 15-17% sterilisation rate in our view. Quite naturally, Mr. Virág refrained from going into guesse...