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Hungarian Central Bank Minutes Reveal Subdued Disinflationary Pressure

Hungarian Central Bank Minutes Reveal Subdued Disinflationary Pressure

2014-11-12 20:03:00
Walker England, Kara Dailey,
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Talking Points:

  • Minutes reveal mid-term inflation target remains attainable with loose monetary policy
  • Forint movement post rate decision mostly influenced by country specific rather than external factors
  • EURHUF approaches trend line support at 306

The Hungarian Central Bank’s Minutes were released today, accompanying their October 28th rate decision. The minutes mainly reiterate sentiment shared immediately following the decision itself, with figures from the November 5th Growth Report lending further credence. The assessment looks at Hungary’s international positioning relative to its domestic growth capabilities, and concludes that mid-term targets remain attainable with continuation of the current monetary policy.

Despite CPI in October remaining negative at 0.4%, interim developments in industrial production, international trade and capital investments indicate a weakening of disinflationary pressures. Industrial production jumped from 0.5% (YoY) in August to 7.6% (YoY) in September, aided by a rise industrial export sales (+8.0%) and domestic industrial sales (+2.0%). Manufacturing PMI experienced a similar upswing moving from 52.7 in September to 54.9 in October. Germany, Hungary’s largest trading partner also saw improvement, with their October Manufacturing PMI moving into expansionary territory at 51.4 after registering 49.9 in September.

Although weaker, disinflationary pressures still remain with GDP in Q3 expected to fall after increasing 0.9% in Q2. One clue comes from the trade surplus which as a proportion of GDP dropped, remaining just below 8%. This reduction may impart stem from a fall in producer prices (-3.3%) as well as global commodity prices. Case in point the forint price of oil continues to decline keeping expected inflation near zero in the short run. However, despite contractions in several key economic indicators, the state closed the month of October with a surplus of 35bn HUF—more than double the surplus recorded in September.

Furthermore, conditions in the international financial market have slightly improved since the October 28th decision with the VIX index, which measures expected future volatility, falling from 14.39 to 12.92. Additionally, one week and one month swap spreads are down 60-70 bps while the government securities yield curve has flattened out in October relative to September.

The recent appreciation of the forint against the euro is a reflection of the positive interim developments discussed above. However, as the EUR/HUF approaches support, a bounce from the trend line could signal a return to euro strength.

EUR/HUF Daily Chart

dailyfx eur/huf daily chart.

Chart Created by Walker England Using MarketScope 2.0

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