Hungary's Inflation Slows, Rate Cut Hopes Rise

Inflationary pressures in Hungary eased in August, bringing a glimmer of hope for a potential rate cut by the central bank. The latest data, released by the Central Statistical Office (KSH), revealed a year-on-year inflation rate of 3.4% in August, down from 4.1% in July and exceeding market expectations. This figure marks the lowest inflation rate since February 2021.

This welcome decline in inflation was attributed to the stagnation of the average price level on a monthly basis (MoM) and the high base from last year. The strong monthly increase witnessed in July appears to have been an outlier, as the monthly inflation rate has returned to the stability seen in previous months.

Core Inflation Slows, But Risks Remain

While the overall inflation picture is improving, core inflation, which excludes volatile items like food and energy, remained elevated at 4.6%. However, there was a slight decline compared to July, indicating a potential slowdown in price pressures within the core basket. This moderated repricing suggests that underlying inflation might be stabilizing.

Despite the positive developments, inflationary risks remain for the coming year. The expected pick-up in consumption, continued strong wage growth, and the government's recent tax measures are likely to drive price increases in 2025. This is a key factor influencing ING's revised inflation forecasts for 2024 and 2025, now standing at 3.8% and 4.2% respectively.

Rate Cut in September on the Horizon?

The recent inflation data has paved the way for a possible 25bp rate cut in September by the National Bank of Hungary. This move would be further supported by a 50bp cut by the Fed, which is ING's low-conviction base case, and a dovish stance from the ECB. However, a 25bp cut by the Fed and a hawkish message from the ECB, signaling that the September cut won't be followed by another in October, could complicate the decision for the Hungarian central bank. Ultimately, the EUR/HUF exchange rate could play a crucial role in determining the final decision.

Challenges and Uncertainties

While the inflation outlook has improved, several challenges remain. Services inflation continues to be a concern, and the Hungarian economy might experience weaker performance in the second half of the year. This could limit the ability of businesses to reprice their goods and services effectively, especially in the face of rising costs.

Despite these challenges, the recent decline in inflation has given a much-needed boost to the Hungarian economy. The central bank's commitment to a cautious and patient approach to monetary policy, aimed at maintaining financial market stability and achieving the inflation target, is likely to guide its future decisions. As the economic landscape evolves, the next few months will be crucial in determining the path of Hungary's economic recovery.

The Forint's Uncertain Path

The Hungarian forint has weakened in recent months, a trend that could make it harder for the central bank to ease policy. This weakness is attributed to several factors, including the country's risk premium, which has been amplified by tensions between the government and the National Bank of Hungary. The forint's performance, therefore, will be closely watched as it could be a deciding factor in the central bank's decision regarding interest rates.

The recent inflation data has undoubtedly brightened Hungary's near-term inflation outlook. However, the road to a full economic recovery remains paved with challenges and uncertainties. The central bank's role in navigating these challenges will be crucial, as will the government's commitment to maintaining fiscal discipline. The forint's future trajectory will also be closely monitored, as it could influence the effectiveness of the central bank's monetary policy measures.