Economic Analysis - MNB Easing Heightens Inflation Risks - 02 OCT 2017

BMI View: M onetary policy will continue to be highly accommodative through 2017 and into 2018 , despite rising core inflationary pressures. As such, there is a significant risk that the Hungarian National Bank ( MNB ) falls behind the curve , with negative implications for its credibility and the growth outlook .

Inflationary pressures will intensify in 2018 as the Hungarian National Bank (MNB) provides an increasingly accommodative monetary policy environment, risking a significant overshooting of inflation target levels. Hungary's consumer price index (CPI) expanded by 2.6% y-o-y in August, sustaining a period since the start of 2017 in which headline inflation has been within the lower bound of the MNB's 3%+/-1pp inflation target band, after trailing below it since 2013. Significantly, core inflation was the highest it has been since February 2014, climbing to 2.8% y-o-y in August, the fifth consecutive month of acceleration. Real interest rates are deeply negative and very low relative to regional and emerging market peers ( see chart below), highlighting the disconnect between recent inflation trends and the MNB's ongoing easing bias. With further easing a distinct possibility, the risks of the MNB falling behind the curve are intensifying.

MNB Increasingly Relying On Unconventional Easing Methods

MNB Most Dovish Next To Peers
Real Interest Rates, %
Note: real interest rate is calculated as the 3m interbank rate minus headline inflation. Source: National Banks, Bloomberg, BMI

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