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Financial News: Hungary Inflation Likely To Exceed Central Bank's Projecti

Hungary Inflation Likely To Exceed Central Bank's Projection: Capital Economics

09/22/2017 - 07:15:00 (RTTNews)

(RTTNews) - Mounting capacity constraints and rapid wage growth in Hungary suggest that the headline inflation will turn out to be much stronger next year than the central bank expects, Liam Carson, an economist at Capital Economics, said following the central bank's interest rate announcement this week.

The Magyar Nemzeti Bank cut the overnight central bank deposit rate by 10 basis points to -0.15 percent on September 19. The rate was cut to negative last year.

The lending rate was kept unchanged at 0.90 percent. Nonetheless, this plays a much smaller role in determining overall role in determining overall monetary conditions than the deposit rate, the economist noted.

Carson observed that the decision by the central bank to ease monetary conditions further looks like a policy misstep and unless policy makers reverse course soon, they will find themselves facing a more severe inflation problem further down the road.

The accompanying press statement revealed a further easing measure that the cap on three-month deposits will be lowered further, from HUF 300 billion by end-September to HUF 75 billion by end-December - a larger reduction than had been anticipated.

"These moves are likely to push down interbank rates further," the economist noted.

Further, the bank said that the year-end upper limit on the stock of deposits would remain at EUR 75 billion and suggested that it may adjust its swap instruments with which to provide forint liquidity to commercial banks.

The central bank also lowered its inflation projections from 2.8 percent in 2018 and 3.0 percent in 2019 to 2.5 percent and 2.9 percent, respectively.

Capital Economics pointed out that the latest forecasts fail to take account of the economy's mounting capacity constraints and rapid wage growth.

Wages in the private sector are expanding at 13.5 percent annually, which was the sharpest pace in over a decade.

This is likely to feed into a marked rise in consumer price pressures over the coming quarters and the firm's inflation forecast of 3.8 percent for 2018 sits well above that of the central bank, Carson said.

"We're increasingly concerned that policymakers will continue to underestimate inflation risks," the economist said.

"If the MPC fails to reverse course soon, we could see a severe deterioration in the inflation outlook, prompting more aggressive rate hikes down the line."

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