Hungary’s Runaway Inflation May Force More Aggressive Rate Hikes

The faster-than-expected increase in Hungarian consumer prices has taken the market by surprise and is prompting analysts to revise their inflation projections upward. Many believe that the nation’s central bank will be forced to tighten monetary conditions more aggressively than planned to tamper inflationary pressures in the economy.

Hungarian consumer prices jumped 6.5% year on year in October, recording the fastest rise since October 2012. Headline inflation rose from 5.5% in the previous month, according to data released by the Central Statistics Office (KSH). The reading exceeds the market consensus and the National Bank of Hungary’s 6.1% projection. Month-on-month inflation was 1.1%.

No brake on the inflation train
Even though the market expected prices to post a steep increase in October, the actual data was a significant upside surprise. “Inflation is increasingly looking like a runaway freight train without working brakes. The market adjusted its inflation expectations after the 5.5% reading in September, only to be surprised yet again. This time, we can’t lay the blame on the base effect, as month-on-month inflation was 1.1%,” said Péter Virovácz, chief economist at ING Bank in Budapest. He added that although there were some surprises in the inflation data, the majority of the acceleration stems from fuel.
Data published earlier this week showed that the surge in headline inflation in October was primarily driven by a 30.7% increase in fuel prices. Food prices climbed 5.2%, with cooking oil up 30% y/y, potato prices rising 27% and margarine prices by 19%. Consumer durables rose at their fastest pace since 2009, up 5.4% y/y while services prices were up 3.7% y/y.
Hungary’s economy is exposed to widespread inflation pressure, with non-core elements, shortages related to core goods and services, and second-round effects all in play, according to the economist.
In the wake of the October inflation reading, ING is revising its inflation projection upward, forecasting an average inflation rate at 5% in 2021 and an average yearly price increase in the 4.5% - 4.7% range over the next year.
As the October headline figure significantly exceeded the short-term forecast published in the central bank’s September Inflation Report, it is almost certain that inflation this year and next will be higher than the central bank’s projection, meaning a delay in reaching the inflation target if the central bank does not deviate from the interest rate path behind the forecast, Virovácz noted.

Cap on fuel prices
In an effort to stem the rise in consumer prices, Hungary's government announced it will impose a cap on fuel prices. For a three-month period starting from Nov. 15, petrol and diesel prices cannot exceed HUF 480 per liter at petrol stations, which is lower than the current price of over HUF 500, Gergely Gulyás, Prime Minister Viktor Orbán's chief of staff said this week. "We hope this will aid the economy and may also contribute to curbing inflation," Gulyás said, adding that the government will continue the freeze on retail energy prices.

Chances for stronger rate hikes increase
Headline inflation is on track to climb further, possibly hitting 7% in November, according to analysts. Takarekbank raised its 2021 target from 4.9% to 5% while Erste Bank noted that there are a number of upside risks to the inflation outlook, including the spillover effects of expansionary fiscal policy, continued wage increases and rising energy and commodity prices. Some economists say the Hungarian central bank, which started raising rates in June only to slow the pace of tightening in September, could be forced to raise interest rates sharply next week to rein in inflation and support the forint.
“When it comes to monetary policy, we see an increased chance that the central bank will deviate from the 15 basis-point steps seen in the past two months and will set itself up to raise interest rates at a faster pace,” ING’s Virovácz said.
Hungary’s MNB became the first central bank in Europe to launch a tightening cycle in June, a sharp U-turn from its ultra-loose policy. It raised rates in 30 basis-point steps between June and August, but slowed down the rate hike to 15 basis points in September and October, respectively. At the last meeting, policymakers said inflation "would remain elevated over a longer period" and that achieving the inflation target "may be delayed" compared to the projection in the September report.