Higher Inflation in Hungary Complicates MNB Easing Plans

Hungary's inflation rate inched up in July, surpassing the top end of the central bank's target range and narrowing the room for the continuation of its more than yearlong monetary-easing cycle. After two months of stagnation in the monthly rate of price increases, the pace of one-month inflation shows the same dynamic as the one seen in the first four months of the year.

Consumer prices rose 4.1% annually in July, up from 3.7% in June, the Budapest-based statistics office reported this week. The median forecast of 20 analysts surveyed by Bloomberg was 4%. Prices also climbed 0.7% month-on-month.

"The structure of inflation remains worrying, driven by high monthly repricing for both the headline and core baskets," said economists at ING Bank in Budapest in a research note. "In our view, the upside surprise to the central bank's forecast is likely to prompt the Monetary Council to keep rates on hold in August."

Drivers of inflation
Food prices rose 0.6% from the previous month, likely due to the removal of price caps and mandatory in-store discounts. Fuel prices also increased 3.8% month-over-month, contributing 0.2 percentage points to the monthly rise. However, household energy prices unexpectedly fell, despite the hot weather driving up demand for air conditioning.

Prices of durable goods rose by 0.3% on a monthly basis, posting the largest increase since January 2024. At the same time, prices of clothing and footwear declined by 1.2% month-on-month, which is also the largest decline for the past six months.

Services inflation came in at 1.1% month-on-month, but due to last year’s high base, the annual rate fell to 9.1%. Within services, the main increases were in recreational and postal services. In terms of annual headline inflation, the services component explains roughly 60% of total inflation.

Rates on hold?
The strong monthly repricing not only concerns volatile items but also elements within the core basket. This, in turn, underscores ING’s long-held view that the structure of inflation in Hungary remains worrying. As the National Bank of Hungary had expected a headline rate of 3.8% for the July inflation print, the upside surprise relative to its forecast makes a hold on rates more likely in this risk environment than a rate cut in August.

The National Bank of Hungary cut its benchmark rate by a quarter-point to 6.75% last month, the 15th consecutive easing step. But the latest inflation data has fueled speculation that policymakers may now pause their rate-cutting cycle.

"Rate-setters may have space for one or two more quarter-point cuts this year, even with inflation seen hovering around 4% in the rest of the year," central bank Deputy Governor Barnabás Virág said after last month's decision. The monetary authority targets 3% inflation in the medium term, with a one-percentage-point tolerance band.

The forint gained 0.2% against the euro after the inflation report, though the currency has dropped almost 2% against the European common currency since before the latest rate cut on July 23.