Hungary’s Inflation Drop to 43-Year Low Keeps Rate Window Open

Hungary’s inflation rate fell to a 43-year low in December on the back of government-mandated energy-price cuts, allowing the central bank to re-evaluate a plan to slow the pace of monetary easing.

Consumer prices rose 0.4 percent in December from a year earlier, the slowest pace since March 1970, after a 0.9 percent increase in November and matching the median estimate of 18 economists in a Bloomberg survey. Prices fell 0.5 percent in the month, the central statistics office in Budapest said today.

The Magyar Nemzeti Bank last month said it will probably slow the pace of interest-rate reductions after 17 consecutive cuts brought its benchmark to a record-low 3 percent. The central bank may delay the move as continuing utility-price cuts keep inflation subdued, said Zoltan Torok, an economist at Raiffeisen Bank International AG in Budapest.

“Policy makers may decide to stick to their 20 basis-point pace in rate cuts this month as inflation is set to remain below 1 percent in the better part of 2014,” Torok said in a telephone interview today.

The forint has weakened 0.3 percent to 300 per euro as of 12:12 p.m. in Budapest. It has lost 0.9 percent this month, the fourth-worst performance among 24 emerging market currencies tracked by Bloomberg. The yield on the government bond maturing in 2023 declined 2 basis points to 5.47 percent.

The decision to slow rate cuts isn’t “a done deal,” central bank Vice President Adam Balog said Jan. 9. The inflation rate has been under the central bank’s medium-term target of 3 percent since February, aiding policy makers’ efforts to buttress an economic recovery.

Energy Prices

Hungarian Prime Minister Viktor Orban, gearing up for elections in the second quarter, cut household energy prices by 20 percent in two steps last year and announced a third round of reductions in December.

Household energy costs plunged 17.7 percent in December from a year earlier and fell 8.1 percent from the previous month. Core inflation, which strips out volatile energy and food prices, was 3.5 percent. The average inflation rate was 1.7 percent in 2013, lowest since 1970, down from 5.7 percent in 2012.

The central bank predicts price growth will average 1.3 percent in 2014 and 2.8 percent in 2015.

Easing Room

“There is still plenty of room to come lower with rates” as the U.S. Federal Reserve’s decision to slow its monthly bond-buying program isn’t significant for Hungarian monetary policy, Gyula Pleschinger, a member of the rate-setting monetary council, said yesterday, the Wall Street Journal reported.

The Fed tapering “doesn’t limit Hungary’s rate-cut scope,” Balog said during a conference in Vienna today.

The easing cycle, set to carry the benchmark rate to as low as 2.6 percent, may be reversed in the fourth quarter as external conditions will tighten, inflation may accelerate and domestic demand is set to strengthen, Eszter Gargyan, Budapest-based economist at Citigroup Inc. wrote in an e-mailed note today.

A “soft inflation outlook, gradual recovery in household consumption and signs of a loss in industrial-output growth momentum in the last quarter of 2013 may firm the MPC’s bias to carry on gradual rate cuts,” Gargyan said.

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