Banks Worldwide Adopts Cautious Monetary Policy

The Hungarian central bank (MNB) is broadly expected to continue its easing cycle with yet another 25bp rate cut, which should bring the key policy rate to 6.0% at next week's Monetary Policy Council meeting. It is very clear that the doves on the Monetary Council are in more or less full control of monetary policy. Consequently, we expect the MNB to continue the easing of monetary policy in coming months despite inflation being double the level of the MNB's official inflation target of 3%.

The continued rise in Hungarian inflation is worrying, particularly because the lacklustre growth in the Hungarian economy reflects to a large extent deteriorating supply-side conditions. Therefore, contrary to most places in Europe, monetary policy is unlikely to improve growth fundamentally without inflation getting seriously out of control.

South Africa faces increased inflationary pressure
The South African central bank (SARB) has adopted a cautious approach towards monetary policy. This week's statement following the rate decision, where the SARB left interest rates on hold (as broadly expected), was clearly tilted in a more hawkish direction. Despite this, the central bank said the domestic growth outlook had deteriorated further: however, the SARB seemed quite concerned about increased inflationary risks coming from food prices, rand weakness and CPI changes with the risk that the inflation target range could be breached.

The statement clearly suggests the SARB will not be willing to ease monetary policy in an environment of building upside inflationary pressure. Although we still assume one more 50bp rate cut in our forecasts, this might materialise only in the case of further considerable domestic economic slowdown.

New Prime Minister is moving
Leader of the Social Democrats Algirdas Butkevicius was last week approved as Lithuania's new Prime Minister. In his first 15 days in office, he has had to convince Lithuanian President Dalia Grybauskaite to accept the nominations for the new ministers in his government. This could be a problem, as President Grybauskaite has said that all ministers will be required to know one of the three working languages of the EU to assure a fully fledged assurance of Lithuania's EU Presidency, which comes in the second half of 2013. Here the language requirement could be a problem for some of the ministry's nominees.

In terms of potential changes in the economic programme, it is worth noting that the new prime minister promised to maintain fiscal discipline. Parliament has proposed a slight reduction in expenditure, with the deficit target currently 2.5% of GDP for 2013. However, in the future, one of the major wrong doings the new government could be the introduction of VAT exemption for local producers (such as meat).

Given that the pass-through to consumer prices of such a VAT reduction would be very low while the budget would suffer due to reduced tax revenues, the only beneficiaries would be retailers and producers. The minimum wage is likely to be increased next year to 1,000 litas (EUR209), which in our view should not have a significant negative impact on the Lithuanian economy. That said, the higher increase in the minimum wage might have a significant dampening effect on the labour market recovery.

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