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Hungarian inflation surprisingly slumps to 40-year low, CNB defends decision to intervene

Hungarian inflation surprisingly slumps to 40-year low, CNB defends decision to intervene

13.11.2013 12:46

Yesterday, the Hungarian forint extended its losses after October’s inflation data showed that consumer prices had risen less than market predicted. According to the Hungarian statistical office, consumer prices rose by 0.9 % annually in October, which was the lowest growth rate in almost 40 years. A price decrease was measured in various segments of the consumer basket, namely at electricity, gas and other fuels, consumer durable goods, motor fuels, clothing and footwear.

Moreover, high yields of this year’s crop push food prices down. Under such circumstances, more expensive financial services together with rising prices of alcoholic beverages and tobacco couldn’t stop the downward trend. Referring to the low inflation reading, NBH governor Matolcsy said that the bank should further gradually reduce its base rate in order to counter disinflation. Concerning the Czech FX market, the koruna is likely to remain close to 27 EUR/CZK for some time. According to CNB governor Singer, the bank plans to keep koruna around 27 CZK/EUR for at least 1.5 years. Because interventions against the Czech currency launched by the CNB last week have provoked heated discussion and the bank has been facing criticism from both general public and professionals, CNB staff started to defend and explain their position. The reasoning published on the central bank’s website includes arguments ranging from defence of inflation targeting up to the belief that imported inflation speeds up deferred households’ consumption and supports economic growth (which is contentious, in our view). We suspect that the actual effect might be opposite and households might further scale down their demand as they will be afraid of a fall of their disposable income. One seems clear now though: we have been facing a period of stability of the Czech currency around 27 EUR/CZK, although it is plausible that after the end of the intervention regime, the koruna will tend to return back to stronger values.

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