"As economic recession is likely to keep price and wage hike intentions in check for a long term, Hungary should expect a persistently low inflationary environment, the staff of Hungary’s central bank (NBH) said in the bank’s quarterly Report on Inflation published on Wednesday.The persistently low CPI course is rooted in recession as the improving global environment cannot sufficiently offset the considerable erosion in domestic demand therefore recovery of the local economy could be slower than most European countries, the NBH said. Imbalances that built up over the past few years make this adjustment necessary that in the long term can help create a healthy economic structure, they added.
According to the latest Report on Inflation, Hungary’s annual average inflation will come in at 4.2% in 2009 and drop to 3.9% in 2010 and to 1.9% in 2011.
The recessionary environment has put increasing downward pressure on prices, the NBH said.
Inflation data in recent months have been lower than the c.bank expected, due in nearly equal parts to falling unprocessed food prices and better-than-expected core inflation developments.
"The latter suggests that the recessionary economic environment has recently exerted increasing downward pressure on prices, as suggested by the smaller-than-anticipated upward pressure on prices from the increase in indirect taxes compared with previous experience."
"Following the indirect tax raises in July the ensuing increases in price levels were weaker than expected, and a strong disinflationary trend was observed even amongst market services, which have a history of persistently rising price levels. Increasingly subdued pricing decisions have been accompanied by deceleration in nominal wages as well."
"This process is also expected to remain characteristic in the coming years, contributing to the development of a sustained, low inflation path."
The projection in the November Report is based on the key assumptions that (i) the central bank base rate is held constant at 7.00% (vs. 8.50% in Aug); (ii) the forint exchange rate remains at EUR/HUF 268.7; and (iii) the price of crude oil moves around EUR 80 per barrel.
Barnabás Virág, head of the NBH staff that created the Inflation Report, told a press conference today that the crude oil futures price estimate has been raised by about 10%, while the EUR/HUF assumption changed only marginally since August.
As a result of the global recession, economic output has declined sharply in Hungary. Although domestic export sales have started to pick up in recent quarters in line with the stabilising international environment, the marked downturn in domestic demand continues to be manifested in falling GDP.
"This duality in growth structure is expected to remain pronounced in the quarters ahead as well, inhibiting the Hungarian economy’s recovery from the recession."
Consistent with its forecast published in August, the NBH does not expect a rebound in economic growth until mid-2010.
Provided that the above assumptions hold, the Hungarian economy is likely to remain in recession for a protracted period, the NBH staff projects.
"Although the benign global environment is likely to have a positive impact on domestic growth prospects for 2010, the projection assumes that the negative effects of the necessarily pro-cyclical fiscal and monetary policies and the private sector’s continued adjustment may be dominant."
The c.bank expects the local economy to recover strongly only from the middle of 2010, lagging behind the developed European countries and the economies of Central and Eastern Europe.
As the upward pressure on the CPI index from the indirect tax increase unwinds, consumer price inflation may fall below the medium-term target from the middle of 2010 and is expected to be around 2% in 2011.
"Exerting an unfavourable effect in terms of growth, developments in domestic demand significantly reduced the external financing requirement of the Hungarian economy, and thereby its vulnerability. This more sustainable external equilibrium position may remain evident even when growth dynamics accelerate."
"The steady improvement in global investor sentiment has also had a favourable impact on perceptions of risk associated with the Hungarian economy. All measures of risk have continued to fall, and at the same time the exchange rate has remained at the appreciated level seen in the first half of the year. Domestic developments have also facilitated improvement in risk sentiment."
"The real economic adjustment has led to a sharp decline in the external financing requirement, and measures to attain fiscal sustainability have contributed to an improving assessment of the path of government debt, as confirmed by international comparisons."
Source: Portfolio Online Financial Journal
26.11.2009