Inflation Puzzle Sows Dilemma for Europe's Last Stimulus Holdout

(Bloomberg) -- Hungary’s central bank, the only one left in Europe still adding stimulus to its economy, is expected to hold its ground as it navigates soaring wages and a slump in oil prices that are pulling inflation in opposite directions.

Policy makers who’re adding liquidity to the economy through unconventional measures are expected to maintain loose financing conditions as they set parameters for the first quarter of 2019 on Tuesday.

Investors will pore over the bank’s new forecasts and watch whether it further mentions the need for eventual tightening after it signaled in September stimulus may end soon. An announcement at 2 p.m. in Budapest will be followed by a statement an hour later.

While plunging oil prices helped pull back inflation to near the central bank’s 3 percent target last month, core price growth has climbed higher, reflecting soaring wages and consumption. Those dynamics may prove difficult to reconcile with the dovish activism that has made Hungary’s monetary policy stand out from its peers in the European Union’s east.

"The case for the prompt commencement of policy normalization has diminished," Nomura analyst Marcin Kujawski said in an emailed note. "The council will maintain cautious language related primarily to core price pressures."

Investors have reacted to the impact of oil prices, which have plunged by about a third since September. The 10-year yield on government bonds has fallen 65 basis points in the last two months. In a Bloomberg survey, economists predicted the central bank will probably delay the start of policy normalization until June. Money markets investors are betting on about 45 basis points in tightening for the next 12 months.

"There’s a good chance that the usual dovish communication will suffer from some hawkish-leaning adjustments," said Nora Szentivanyi, an analyst at JPMorgan Chase & Co. "Less likely but possible, we could get some guidance about the timing of the next steps in policy tightening. Given that the Monetary Council leans heavily dovish, this would be a meaningful step."

To contact the reporter on this story: Marton Eder in Budapest at meder4@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Michael Winfrey, Andrew Langley

©2018 Bloomberg L.P.