Watch out on March 28: an advance warning on monetary policy

HUNGARY - In Brief 14 Mar 2017 by Istvan Racz

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Two weeks ahead of the next regular monthly rate-setting meeting of the Monetary Council on March 28, when the next quarterly inflation report is also due to be discussed, please be warned that the otherwise somewhat uneventful Hungarian central bank policy is facing an interesting situation. This is because of the recent sharp pick-up of CPI-inflation, in the face of a monetary policy that has an expressed loosening bias, and perhaps even more because of an increasingly serious conflict between actual inflation and the MNB's inflation forecast published in the previous inflation report in December 2016.As a reminder, the MNB expected in December yoy CPI-inflation to rise from the actual average 1.3% in Q4 to 2.2% in Q1 2017, then to edge back to 2% in Q2, then rise to 2.6% in Q3 and Q4, followed by 2.9% in Q1 2018 and a straight-line 3% (i.e. exactly the target level) in Q2-Q4 of next year. Over the same period, the MNB also expected in December the yoy rate of core inflation, excluding the impact of indirect taxes, to drop marginally, from the actual 1.5% in Q4 2016 to 1.3% in Q1 this year, followed by a straight-line increase by 2 decimal points per quarter to 1.9% in Q4, from which point it would stagnate at 2% sharp throughout the whole of 2018.However, there is a problem with the starting point, as in reality, the yoy headline rate rose to 2.3% in January and to 2.9% in February, and after - according to our forecast - a likely further small rise in March, it is heading towards an average 2.8% in Q1, i.e. 0.6 points above the MNB forecast. Similarly, adjusted core inflation stood at 1.8% in February and is heading to an average 1.7% in Q1, i.e. 0.4 points above t...