Hungary Inflation Rate Unexpectedly Drops

Hungary’s inflation rate unexpectedly dropped to a 12-month low in December, adding to arguments for monetary-policy makers to continue reducing interest rates.

The inflation rate was 5 percent in December, compared with 5.2 percent in November and the 5.2 percent median estimate of 15 economists in a Bloomberg survey, the statistics office in Budapest said. Prices were unchanged versus November.

Outgoing central bank President Andras Simor, who on Dec. 7 urged the bank to act “much more firmly” against inflation, has been outvoted along with his two deputies on rate cuts by non-executive members who want to spur an economy battling its second recession in four years. The bank lowered the two-week deposit rate to 5.75 percent on Dec. 18 in the fifth quarter-point cut in as many months.

“This release is consistent with further easing ahead, though the timing of the cuts in the near turn will be affected by the appointment of the new” central bank governor, Raffaella Tenconi, a London-based economist at Bank of America Merrill Lynch, said by e-mail. “The breakdown also confirmed muted inflation risks.”

Matolcsy Effect

The forint weakened last week after Economy Minister Gyorgy Matolcsy, the favorite to succeed Simor in March, according to the news website Index, said Hungary should reject “traditional” economic models including policies to fight inflation that kept the forint strong. The currency gained 0.5 percent to 294.05 per euro by 9:42 a.m. in Budapest.

Matolcsy’s appointment may trigger a pause in the easing cycle given an expected negative market reaction, according to Tenconi.

Core inflation adjusted for indirect tax changes was 2.5 percent from a year earlier in December, the central bank said in a release on its website today. Demand-sensitive inflation was 2.1 percent while sticky-price inflation was 2 percent, according to the release.

The Magyar Nemzeti Bank today started to publish “basic indicators” of inflation each month, instead of quarterly. The monetary authority wants to increase the transparency of monetary policy decision-making, it said yesterday.

The figures “indicate that, despite the lower-than-expected inflation data, there’s no substantial improvement in the basic inflation trends,” Eszter Gargyan, an economist at Citigroup Inc. in Budapest, said by e-mail.

Food Prices

The decline in the inflation rate was helped by a halt in food-price increases, statistician Borbala Minary told reporters today. An increase in the excise tax on tobacco products, which boosted prices in December 2011 and was repeated in late 2012, is yet to show in the price index, she said.

Food prices were unchanged on the month, consumer durables prices declined 0.2 percent while the price of alcoholic beverages and tobacco fell 0.1 percent. Seasonally adjusted core inflation, which strips out volatile energy costs, was 4.9 percent in December.

Prime Minister Viktor Orban is looking to use monetary stimulus to boost growth before the 2014 elections after his “unorthodox” policies helped drive the economy into its second recession in four years, damaging investment, lending, consumption and growth.

The policies included special levies on the banking, energy, retail and telecommunications industries, as well as the nationalization of private pension fund assets to keep the budget shortfall below 3 percent of economic output to avoid losing EU development funds.

‘Strategic Alliance’

The new Magyar Nemzeti Bank chief should follow the European Central Bank and the Federal Reserve in providing monetary stimulus, “bravely” using unorthodox tools as part of a “strategic alliance” with the government, Matolcsy said on Dec. 22.

The central bank’s quarterly staff report last month lowered the inflation forecast for 2013 to an average 3.5 percent from 5.8 percent in September, as a result of the government cutting household energy prices by 10 percent from January and delaying an increase in excise taxes. The bank sees the economy growing 0.5 percent this year after an estimated 1.4 percent contraction in 2012.

The four non-executive policy makers, appointed by Orban’s ruling party in 2011, have pointed to the resilience of the currency and falling risk premium for supporting monetary easing. They have also argued that the inflation rate may drop to the bank’s target in 2014 as cost shocks from energy and food prices fade.

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