Forex Flash: HUF performance may become hurdle for the MPC – TD Securities

TD Securities analysts say that the HUF performance could become a serious hurdle for the MPC to overcome if they decide to continue easing, as inflation falls on the heels of favorable base effects and close to non-existent domestic private demand. "The double GDP & CPI data release today showed that the slowdown in economic activity continued in Q4 and was deeper than expected, revealing a sharp drop in domestic demand as the main driver of disinflation in the recent months”, wrote analyst Cristian Maggio, pointing to the GDP at -2.7% Y/Y in Q4, down from -1.5% in Q3, and below consensus of –1.9%. “Weak Q4 data implied that the Hungarian economy contracted by 1.7% in 2012, 0.2ppt below our estimate of -1.5%”, Maggio added, saying that CPI continued to decelerate against this backdrop, reaching 3.7% Y/Y in January (consensus of 3.9%) from 5.0% in December, "with the sharp drop driven by the phasing out of the VAT increase from 25% to 27% in Jan 2012, and utility bill cuts this year". "We think that the easing cycle will continue, but not at the pace of one cut per month", the analyst concluded.