MNB is running out of reasons to loosen further

HUNGARY - In Brief 02 Dec 2016 by Istvan Racz

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Most recent events seem to push circumstances towards a situation in which the MNB may have much less reason to loosen further than previously, if any at all. Of those, the forint's weakening to the current EURHUF 314 from the previous 305-310 range has long been part of our forecast, because of the unsustainability of the previous exchange rate from the point of view of industrial competitiveness. However, the appreciation of the $ to EURUSD 1.06 from over 1.1, the breakthrough of the WTI crude oil price to $51/bbl, and the Hungarian government's most recent wage and tax measures are all new to our earlier calculations. Regarding the latter item, we expect nominal gross wages to rise by 10-12% in 2017. At this point, please note, among other things, that the unemployment rate is now down to 4.8% (October) and keeps falling, so the labor market is really tight.The point to make here is that all this does not seem to be consistent with our end-year CPI forecast of 1.5% yoy in 2016 and 2.2% yoy in 2017, in addition to not being consistent with the MNB's September 2016 CPI forecast of 1.1% yoy in Q4 2016 and 2.3% yoy in Q4 2017. Of course, whether the new levels in EURHUF, EURUSD and WTI are becoming permanent or they will be reversed at some point remains a question, but the powerful wage/tax deal seems to be a done deal now. Should the current exchange rates and oil price stay, CPI inflation should end up at 1.6% yoy in December (little pass-through only this year as we are very close to end-December already) and 3% yoy at end-2017. In other words, the MNB inflation target of 3% could be reached much sooner than previously expected.Should a big part (possibly more than ...