• Data on July’s inflation in Hungary and Romania were released this morning. Hungarian inflation rose to 5.1% y/y in July from 3.7% y/y in June, but this merely reflects the increase in VAT in July. Romanian inflation dropped to 5.1% y/y in July compared to 5.9% y/y in June.
  • Today’s releases did not present any surprises and do not affect our expectations for the remainder of 2009. Our view on the monetary policy in Hungary and Romania is thus also unchanged and we continue to expect the Hungarian central bank (MNB) to cut its key policy rate by 50bp at its next two meetings from 8.50% to 7.50% and the Romanian central bank (NBR) to cut its key policy rate by 50bp from 8.50% to 8.00% in six months.

The Hungarian statistical office released data on July inflation this morning. The data showed that inflation rose to 5.1% y/y in July up from 3.7% y/y in June. The increase is primarily due to a hike in VAT with effect from 1 July. The VAT hike was expected to have a greater impact on Hungarian inflation in July – both our and the consensus expectation was 6.1% y/y in July. Consequently, inflation might rise further in the coming months as more Hungarian retailers implement the price hike. In general there is very little inflationary pressure in Hungary and we expect inflation at 5.1% y/y on average in 2009. Furthermore, we do not expect today’s reading to affect expectations concerning further rate cuts from MNB, given the large uncertainties regarding this reading. We continue to expect two more cuts of 50bp at the next two meetings, which is roughly in line with current market pricing three months ahead.

The Romanian statistical office published data on July inflation this morning. Romanian inflation dropped to 5.1% y/y in July compared to 5.9% y/y in June – slightly below the consensus expectation of 5.2% y/y and our expectation of 5.6% y/y. Romanian inflation is now almost 4%-points lower than the peak at 9.0% y/y in July last year and we expect it to trend further down on the back of the economic crisis. On average we expect Romanian inflation at 5.9% y/y in 2009. Furthermore, we continue to expect NBR to cut the key policy rate by 50bp in six months. Today’s low inflation numbers might even open the door for further monetary easing going forward if the currency remains stable.