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ANALYSTS: NBH NOT UNDER PRESSURE TO TIGHTEN MONETARY POLICY

Hungary’s central bank is not under pressure to tighten monetary policy, though some policy guidelines at this month’s meeting of the Monetary Council would help strengthen its credibility, London-based emerging markets economists said.

Analysts at BofA Merrill Lynch Global Research said it had turned out to be a relatively calm summer, “suggesting to us that the NBH is not under any significant pressure to tighten policy soon”. “We wrote in early July that the central bank was likely nearing the pain threshold if EUR/HUF sustainably stayed at 330 or above through the summer. Such a scenario, on our calculations, would have led to inflation near the 4% upper band in the third quarter … and more prolonged overshooting of the 3% target, adding to the markets’ unease about the dovish policy stance”. In turn, this could have pushed forint even weaker, leading to more inflationary risks. However, with relatively calm forint developments in the past two months, “we think inflation is likely to peak around 3.5% in the third quarter before moderating towards 3% by mid2019 — this is a much milder inflation profile in the NBH’s favour, in our view”.

The July inflation reading at 3.4% was exactly in line with the NBH’s forecasts. The only major upside was the new vehicle component, rising 3.1% month on month. This could be an early sign of FX pass-through, though a single item is not yet sufficient to confirm an upward price adjustment process in the economy. The NBH will likely keep a close eye on this, “but we believe it is in no rush to react”, the report says.