Hungary Price Surge May Delay Rate Cut, Citigroup Says

Hungary’s inflation accelerated to the fastest pace in the European Union last month, which Citigroup Inc. said may force the central bank to delay cutting the 27-nation bloc’s highest interest rates.

Consumer prices rose 5.9 percent from a year earlier, the most since March 2010, after a 5.5 percent increase in January, the statistics office in Budapest said today. The median estimate of 18 analysts surveyed by Bloomberg News was 5.6 percent. Prices jumped 0.8 percent from January.

The Magyar Nemzeti Bank, which targets 3 percent inflation, on Feb. 28 kept the benchmark interest rate unchanged at 7 percent for a second month after policy makers rejected a motion to cut borrowing costs, citing delays in the government’s talks for financial assistance from the International Monetary Fund.

“Given the upside surprise in inflation and the uncertainties related to IMF loan talks, we do not see any scope for rate cuts in the first half of the year,” Citigroup’s Budapest-based economist Eszter Gargyan said in an e-mail.

The forint weakened 0.1 percent against the euro to 294.13 at 12:35 p.m. in Budapest. The currency has gained 7.1 percent against Europe’s common currency this year, the fifth-best performance among about 170 currencies tracked by Bloomberg.

‘Far-Reaching Conclusions’

Policy makers shouldn’t draw “far-reaching conclusions” from a single piece of data, central bank President Andras Simor said of the January inflation data after last month’s rate decision. A “sustained higher inflation path” would justify a rate increase, central bank Vice President Ferenc Karvalits said Feb. 17.

The central bank is “unlikely to move to tighten policy on the back of this, or indeed, even a couple of months of weak CPI prints,” Tim Ash, head of emerging market research at Royal Bank of Scotland Plc in London, said in an e-mail today, citing a jobless rate above 10 percent and “weak European growth drivers.”

The main driver for monetary policy will be the IMF loan Hungary requested in November, according to Ash. “Significant progress” in IMF loan talks may trigger rate cuts, while a failure to move closer to an aid package may weaken the forint and lead to a rate increase, Ash said.

IMF Aid Request

The government asked for aid as the forint fell to a record and the country’s sovereign credit grade was cut to junk last year. The forint fell to another record in the first week of this year as investors speculated Prime Minister Viktor Orban may fail to obtain a deal after an IMF delegation left Budapest in December ahead of schedule.

Orban’s pledge on Jan. 5 to come to a “quick” agreement with the IMF and the European Union led to the forint rallying 8.5 percent against the euro, the second-best performance in the world after the Polish zloty.

The rally helped convince the majority of the rate-setting Monetary Council in January to keep the interest rate unchanged after consecutive half-point increases. Talks with the IMF and the EU have yet to start as Hungary has failed to settle legal disputes with the European Commission.

“We still think that the Monetary Council may be forced to implement two more emergency hikes of 50 basis points each as negotiations with the EU and the IMF over a new financing agreement stall,” Magdalena Polan, a London-based economist at Goldman Sachs Group Inc, said in an e-mail today. “But the renewed dovishness of some of the MPC members has increased downside risks to our rate call.”

Fuel, Food

Fuel prices rose 8.7 percent in February from a year ago, compared to an 8.1 percent increase in household energy prices and a 6 percent rise in food prices. From January, household energy prices rose 2.7 percent while food prices increased 1.7 percent, the statistics office said.

The core inflation rate, which strips out volatile energy and food prices, rose 5.4 percent in February from a year earlier.

“We expect headline CPI to decline marginally but stay in the range of 5.5-6.0 percent in the coming months and only decrease closer to 5 percent” in the fourth quarter, Gargyan said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE