The pass through effect of exchange rate is weak

Headlines

The Hungarian consumer price index (released on Friday) fell by 0.3% Y/Y in June which was like in the Czech Republic lower figure than market consensus. Compared to the previous month CPI increased by 0.1%. Core inflation accelerated from 2.5% Y/Y in May to 2.6% Y/Y in June.

The main surprise factor came from food and tradable goods prices. In case of the former, unprocessed food price was well below last year’s level, thanks to mainly the sharp fall of potatoes’ and vegetables’ prices.

Just like in the previous months, the pass through effect of exchange rate is weak. Despite of the depreciation of HUF, tradable good prices decreased, which is strange especially taking in account that the domestic consumption started to accelerate. It suggests that the imported inflation is still very low, although the increasing consumer price index in German may moderate the deflationary pressure in Hungary in the coming months.

Despite the deeper headline CPI figure, Hungary is still not facing with deflationary pressure as the market services and core inflation confirm it (both suggest, that the underling CPI is between 2% and 3% Y/Y level).

We expect that inflation may remain negative in July, but it may return to positive territory in August and may accelerate to around 1.5% Y/Y in December. It means that average CPI may be around 0.2% Y/Y in 2014, while it may accelerate to around 2.3% Y/Y in 2015. Based on our latest calculation headline inflation may reach 3% Y/Y level only at the end of 2015.

The June figure was fully in line with the NBH’s latest forecast, so it doesn’t mean any change of the monetary policy. As vice-governor of NBH said in an interview, that the recent level of base rate is very close to the equilibrium level, the rate cut cycle may above 2% base rate level. He also added that the Monetary Council will tell, when the rate cut cycle is ended, and the Council won’t cut less than 10bp on a decision. It was also important information from him, that NBH is going to help in the process of FC loans conversion to HUF, but they won’t cover all the need of hard currency. So it means that the FX conversion will be done partly on the market, which might cause some HUF weakening. We think that July might by the last rate cut, so base rate might bottom at 2.2%, but NBH might try to maintain it for an extended period, which is likely to be highlighted in the statement as well.