Hungarian inflation surprised on the upside in September as it rose from 3.5% in August to 5.9 % year-on-year last month. A material rise of prices was generally expected, as the middle rate of VAT has increased from 15 % to 20 % since 1st September and excise tax on alcohol and cigarettes has increased by 7 % and 5.7 %, respectively. Surprising was jump in energy and gas prices, which rose by 16.2 m/m and 16.6 y/y, thus showed that the pass-through of energy and gas price deregulation to the end prices was faster than we have expected.
Our view: Yesterday's figures are essential especially to assess the chances for further rate hikes by the Hungarian central bank. The MNB has indicated for a long time that it is going to fight inflation relentlessly (it has already increased the rates by 50 bps three times in a row). So, one can expect the September figures to support the arguments of the hawks in MPC and that the basic interest rate will be raised further between now and the end of the year. Another increase in rates may take place at the next session of the MNB (on 24th October). Our estimate is that the basic 14-day repo rate could increase from the current value of 7.75 % up to 8.50 % by the end of 2006. We cannot exclude, however, that that the official rate could reach an even higher value. This will depend on the development of inflation and also on the strength of the forint.