Page 33 - CE Outlook Regions 2022

reflecting strong underlying inflationary pressures in the economy
due to base and tax effects, the impact of repricing after
pandemic restrictions were lifted, and soaring energy prices.

The National Bank, which for long was the most dovish central
bank in Europe, changed course in June, embarking on a
monetary tightening cycle against the backdrop of that
expansionary fiscal policy. Analysts have highlighted the
dichotomy between the government's loose fiscal policy and the
hawkish stance of the MNB, saying a better-balanced policy mix
would help to contain inflation expectations.

The MNB raised the base rate from a record low of 0.6% in June
to 2.4% by December. In order to anchor rates on the short-end,
it turned to the one-week deposit as its main policy tool, which is
now 120bp above the base rate. At the end of the monetary
cycle, the two rates should converge, according to MNB
policymakers.

The MNB expects the headline CPI to have peaked in November
and is expected to "fall gradually" from December.

Inflation is on track to return to the central bank's 2-4% tolerance
band in Q4 2022, before reaching the 3% mid-term price stability
target in the H1 2023, according to the latest quarterly inflation
report of the MNB. Average annual CPI reached 5.1% in 2021.

The report forecasts a range for CPI in the following years:
4.7-5.1% for 2022 and 2.5-3.5% for 2023.

Hungarian central bank policymakers have signalled readiness
for a long tightening cycle to bring inflation down. Policymakers
warned of the risks of long-term inflation pressures if the
expansionary fiscal policy continues.

The OECD predicts a rise in average annual inflation from 5.0%
in 2021 to 6.0% in 2022. The EC's forecast is 5.1% for this year
and 3.1% in 2021. The OECD said fiscal policy will "remain
expansionary" in 2022, before "gradually consolidating" in 2023.
Analysts at ING Bank see the one-week base rate peaking at
4.5-5% in the H1.

The 20-30 bps rate hikes are fundamentally misguided, says
former central bank chief Gyorgy Suranyi. To shore up the local
currency, which is trading near all-time lows against the euro, the
MNB should make an aggressive one-time 150-200 bps move, he
says.

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