Hungary Inflation Rate Was Probably Unchanged in December

Hungary’s inflation rate, the highest in the European Union, was probably unchanged last month after dropping to an 11-month low in November, spurring policy makers to continue interest rate cuts.

The inflation rate was 5.2 percent in December, matching the November level, according to the median estimate of 15 economists in a Bloomberg survey. The statistics office will publish the data at 9 a.m. in Budapest tomorrow.

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 even as price-growth was projected to exceed the bank’s 3 percent target in the mid-term.

“The majority on the board clearly has an agenda to take rates lower, and we continue to think that the MPC will cut rates to a historic low of 5 percent by the summer or possibly even earlier,” Pasquale Diana, a London-based economist at Morgan Stanley, said in a report today.

The forint, the second-best performing currency last year after rising 9.2 percent against the euro, has dropped 3.4 percent since the last rate decision to 298.15 per euro by 9:30 a.m. today, a seven-month low. The forint’s 2.3 percent fall between the November and December rate decisions failed to end the easing cycle.

‘Traditional’ Models

The currency’s drop accelerated last week after Economy Minister Gyorgy Matolcsy, which news website Index reported is the favorite to succeed Simor in March, said Hungary should reject “traditional” economic models including policies to fight inflation that kept the forint strong.

“Unconventional” monetary policy is probably the “most significant idiosyncratic risk in 2013 for Hungarian assets,” Diana said.

Hungary’s Economy Ministry today blamed Nouriel Roubini, co-founder of Roubini Global Economics LLC, for the currency drop, citing a recommendation last week to sell the forint in the absence of an International Monetary Fund backstop. Calls to Roubini’s London office seeking comment weren’t answered.

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.

Industry Taxes

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.

The new central bank head 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 expected 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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