London, May 6 (MTI) – Hungary’s “exceptionally low” inflation will allow the central bank to cut its policy rate further before starting a new cycle of rate hikes, possibly before year-end, London-based emerging markets economists said today.

Analysts at BofA Merrill Lynch Global Research said in a note to investors that “a common misconception” is that Hungarian inflation is low purely because of the cuts to household utility bills.

“Low food prices have also been responsible for the downside surprises of the last few months relative to our forecasts, leading us to revise down our (average CPI) projections to 0.5 percent this year from 0.8 percent and 2.9 percent in 2015 from 3.0 percent previously”.

In this environment, Hungarian rate setters are likely to cut the policy rate by a further 25 basis points in the coming months, leveraging on the “exceptionally low inflation” relative to the central bank’s 3 percent target.

But they added the bank was likely to start tightening later.

“We retain the view that a gradual tightening from the fourth quarter of this year is likely in order to avoid seeing the real policy rate suddenly drop to negative territory next year, as the (CPI) base effects wane while the economy will be visibly on a strong recovery path by then”.

“We expect the policy rate to reach 3.50 percent in the first half of 2015 – which would actually imply a lower real policy stance than currently”, Bank of America-Merrill Lynch’s economists said.

Their projection for the NBH’s potential interest rate path outlines a much steeper-than-consensus curve, while most London-based analysts still assume that the Hungarian central bank’s easing cycle ended with last week’s 10 basis point cut that lowered the base rate to 2.50 percent, and that the Monetary Council has now adopted a neutral stance, potentially leaving its policy rate unchanged for a prolonged period.

Photo: pannonrtv.com

Source: http://mtva.hu/hu/hungary-matters