Hungary Inflation Is ‘Ammunition’ for Rate Cut, Economists Say
Hungary’s falling inflation rate makes the case for a third consecutive interest-rate cut this month as the central bank seeks to jolt the economy out of a recession, economists said.
The bank will lower the benchmark two-week deposit rate by at least half a percentage point to 7.5 percent on Sept. 28, according to seven analysts responding to the August consumer price report on Sept. 11. Inflation slowed unexpectedly to 5 percent from 5.1 percent in July, compared with the median estimate of 5.8 percent of 15 economists in a Bloomberg survey.
“The lower-than-expected recent inflation data give further ammunition to cut the key rate,” Zoltan Torok, an economist at Raiffeisen International Bank-Holding AG, said in a note to clients.
Policy makers have trimmed 1.5 percentage points off the key borrowing cost since July, after a six-month pause, and say they plan further cuts, anticipating the worst recession in 18 years will rein in price growth. The bank expects to reach its 3 percent inflation target in the medium term, Vice President Ferenc Karvalits said on Sept. 3.
An increase in the value-added tax rate in July raised prices less than earlier estimated as companies are protecting sales amid declining demand.
‘No One’
The August inflation figure “is just another reminder of how weak demand is in Hungary and how this demand weakness offsets pass-through effects,” Christian Keller, an economist at Barclay’s Capital in London, wrote in a note. “If no one wants to buy, businesses have difficulty in raising prices.”
The central bank has brought down the benchmark to 8 percent, including a 1 percentage-point reduction in July, double the size economists had expected my credit score.
“If the external environment remains supportive,” the inflation rate “is a strong signal that the Monetary Council may again choose to cut more than 50 basis points in September,” Gabor Ambrus, an economist at 4Cast Ltd. in Sofia, wrote in a note. A basis point is 0.01 percentage point.
Karvalits said the bank needs to cut the key rate “cautiously” to protect the currency from weakening and to maintain the confidence of investors to finance the budget.
Economic Contraction
The government, which forecasts the economy will contract 6.7 percent this year and 0.9 percent next year, raised the main value-added tax rate to 25 percent from 20 percent on July 1 to keep the budget deficit in check and meet terms of an international bailout as the recession cuts budget revenue.
Hungary was the first European Union country to secure a bailout last year to avert a default during the credit crisis, lining up 20 billion euros ($29.2 billion) from the International Monetary Fund, the EU and the World Bank.
The government has pledged to reduce the budget deficit to 3.8 percent of gross domestic product next year, from a planned 3.9 percent this year.
Consumer-price growth in August was also restrained by a 20.1 percent drop in the price of seasonal foods on the month, statistician Borbala Minary said. That reduced the headline annual inflation rate by 0.5 percentage point, she said.
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