Hungary CPI Drop to 39-Year Low Widens Room for Rate Cuts

Hungarian inflation was the slowest in more than 39 years in August as government-mandated cuts in household energy costs reined in price growth and widened the central bank’s room to lower borrowing costs more.

Consumer prices rose 1.3 percent from a year earlier after a 1.8 percent increase in July, the Budapest-based statistics office said today. The median estimate of 15 economists surveyed by Bloomberg was 1.5 percent. Prices fell 0.3 percent from July.

As he prepares for elections next year, Prime Minister Viktor Orban is pushing utility-price cuts, which have helped keep inflation below than the central bank’s 3 percent target since February. Monetary-policy makers lowered borrowing costs for a 13th month in August, bringing the benchmark to a record 3.8 percent.

“What a wheeze of a strategy from the Orban administration,” Timothy Ash, a London-based analyst at Standard Bank (STAN) Group Ltd., wrote by e-mail. “Force mostly foreign-owned utility companies to cut prices, and this drives headline inflation lower, enabling the” central bank “to continue to cut policy rates. And all this is happening just prior to elections.”

The forint was little changed at 299.43 per euro at 9:53 a.m. in Budapest after rising to its strongest in two weeks yesterday. It has appreciated 0.8 percent over the past six months, the best performance among 24 emerging market currencies tracked by Bloomberg.

The Magyar Nemzeti Bank cut its benchmark rate 0.2 percentage point last month, more than economists predicted, after inflation data “surprised a bit” and showed the need for further easing to reach policy makers’ target, Vice President Adam Balog said on Sept. 5.

Utility Prices

Household energy prices dropped 8.7 percent in August from the same month last year. Orban’s ruling Fidesz party supports another 11.1 percent cut in the household price of natural gas, district heating and electricity by Nov. 1 on top of a 10 percent reduction this year, Antal Rogan, the party’s parliamentary leader, said on Sept. 5.

Central bank policy makers last month slowed the pace of rate cuts after 12 consecutive quarter-point reductions as they seek to fortify a recovery from last year’s recession while safeguarding financial stability and the attractiveness of local assets as the Federal Reserve considers when to start paring its stimulus.

Hungary’s growth and inflation outlook justify further monetary easing while global risks warrant policy caution, rate setters said Aug. 27.

Food prices dropped 1 percent in August from the previous month, while the cost of clothing and footwear fell 2.1 percent, the statistics office said. The core inflation rate, which strips out volatile items such as energy costs, rose 3 percent from August 2012.

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Marton Eder in Budapest at meder4@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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