New data reflects a weakening economy, sharply tighter fiscal policy

HUNGARY - In Brief 08 Mar 2016 by Istvan Racz

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There is rarely a clearer case for further monetary loosening than the current one. CPI-inflation was -0.1% mom, 0.3% yoy in February, the yoy rate dropping from 0.9% in the previous month. Much of this drop was due to another -3.7% mom in fuel prices, but ex-fuel inflation also fell to 1.2% yoy from 1.3% in January (the mom rate was 0.2%, down from 0.3% in Feb 2015), and core inflation fell to 1.4% yoy from the previous month's 1.5%, as core prices on the whole did not move in February. Meanwhile, January retail sales growth was only 2.1% yoy, day-adjusted, down from 4.5% in December, and January industrial output growth was also down to 2.3% yoy, sharply weaker than the 7.1% growth number reported in December. This marks weaker domestic and external demand alike in January. Somewhat strangely, fiscal policy proved to be much tighter in early 2016 than previously. In Jan-Feb, the cumulative central government cash balance was a HUF15bn surplus, marking a very sharp turnaround from a HUF311bn deficit in the same period of 2015. The fiscal swing represented by this change was equal to no less than 5.8% of GDP (!), in the direction of tightening, of course. So what comes out of all this must be a need for further monetary policy loosening. For the time being, the forint was talked back by the MNB to just slightly north of EURHUF 310, which may be understood as the MNB's informal tolerance limit (for HUF strengthening of course), after the forceful verbal intervention made by the central bank around the February rate-setting meeting of the Monetary Council. But this is not a stable position for the forint, as the BOP is in massive surplus, and the rule of thumb is that th...