Soft Hungarian Inflation Boosts MNB Rate-Cut Hopes

Key Moments

Benign Inflation Dynamics Support Easing Bias

Commerzbank analyst Tatha Ghose notes that Hungary’s latest inflation figures have fallen below the National Bank of Hungary’s (MNB) tolerance band, with core and underlying indicators still aligned with the central bank’s target. In his view, this combination reinforces the likelihood of a reduction in the benchmark rate from the current 6.25% level in June.

According to Ghose, the moderation in inflation creates room for monetary policy easing without jeopardizing price stability, given that the disinflation appears broad-based and not confined to a single category of prices.

Details of the CPI Surprise

“Hungary’s CPI inflation slowed significantly to 1.8%y/y in May from 2.1%y/y in April, coming in well below expectations. Consensus forecasts had predicted inflation to be 2.2%y/y. Notably, the 1.8%y/y figure sits just below the lower bound of the tolerance range around the National Bank of Hungary’s (MNB).”

“Some of the downside surprise was linked to supply factors, including administrative price caps on fuel and previous government measures. Even if the degree of softness of CPI may have other reasons, we may generally conclude that recent increases in global energy and commodity prices from the Iran war are not having a huge pro-inflationary impact.”

MNB Policy Stance and June Meeting Outlook

“MNB governor Mihaly Varga has confirmed that the MPC discussed a rate cut on 26 May, but ultimately decided to maintain the benchmark rate in a non-unanimous decision. Varga acknowledged that the central bank now perceives a more benign inflation path and recognises that the change in the country’s risk premium has made the room for lower rates.”

“The weaker inflation data strengthens the case for monetary easing and effectively clears the path for a potential rate cut at the 23 June policy meeting. The current key interest rate stands at 6.25%, and with inflation at around 2%y/y, this implies a high real interest rate, which is pushing the forint stronger.”

Forint and EUR/HUF Expectations

“We do not expect a negative impact of a rate cut on the exchange rate; rather we see EUR-HUF trading around 355-360 over the coming quarter.”

Ghose’s assessment suggests that even if the MNB moves ahead with easing, the supportive level of real interest rates and the improved inflation backdrop may help limit any pressure on the Hungarian forint, keeping EUR/HUF broadly range-bound in the months ahead.