Hungary Embraces Inflation

by: Emerging Money

This is another negative for Budapest and the European nations confronting mounting debt issues. The Hungarian cabinet is now trying to replace the monetary policy committee and relax its inflation expectation targets.

Four of the seven members of the committee -- Hungary's version of the interest-rate-setting Federal Open Markets Committee -- face the expiration of their terms of office in March, but the new government may amend the law to recall them early.

This, in turn, would let the cabinet fill the MPC with people sympathetic to an interest rate cut.

Meanwhile, Budapest is also lobbying to raise its consumer inflation target to 3.5% from its currently low 3% level. Since Hungarian inflation is currently running at an annualized rate above 4%, the choice of targets is a bit moot, but the higher the target, the more lax MPC members can be when it comes to setting interest rates.

In the face of sweeping pension fund changes and other bad news flowing from Hungary, this looks like it will be a major problem for Europe once people have more time to focus. At the moment, everyone is busy simply reacting to negative developments in the PIIGS (Portugal, Ireland, Italy, Greece and Spain), but sooner or later, Hungary's choices may decide whether the euro zone ever enlarges.

In the meantime, any developments that move toward relaxing Hungary's inflation targets will probably drive the local forint currency into a downward spiral. Hungarian stocks are already down 12% since mid-October, led by bellwethers Magyar Telekom (OTCPK:MYTAY), down 20%, and drug maker MOL (OTCPK:MGYOY) which has fallen 16% in the last six weeks.

There is no dedicated Hungarian ETF.

If the market takes this as a sign that there will be a rate reduction, which is likely, the forint could start to depreciate.

Disclosure: No position