Core inflation excluding indirect tax effects – a bellwether indicator of underlying inflation – fell to 6.1% in January from 7.6% in December.

CPI has fallen sharply after peaking at 25.7% a year earlier. Disinflation gathered momentum in the second half of the year due to tight monetary policy, subdued domestic demand and lower energy and raw material prices.

Fuel prices had contributed 0.5pp to the drop in the headline CPI, while market services accounted for 0.3pp and non-durables prices for 0.3pp of the decline, the MNB said in its analysis, adding that the January figure came in below their forecast due to more favourable than expected changes in fuel and processed food prices.

Indicators measuring households' inflation expectations showed "unusually high volatility" in January, the MNB said. Corporate expectations for retail sales and services prices didn't change "remarkably" but were "significantly below" values in the past 1-2 years, it added.

Food prices, which account for 30% of the inflation basket, rose by 3.6% year on year from 4.8% in December, partly due to base effects. Household energy prices, with a 5% weight, dropped by 11.3%. Consumer durable prices edged down 1.4% y/y.

Prices in the category of goods that includes vehicle fuel inched 0.7% lower as motor fuel prices contracted 11.9%. KSH reported one category with a double-digit rise, up 10.4%. This was the result of the early repricing as the increase of the minimum wage was brought forward from January to December, ING Bank analyst Peter Virovacz commented.

Inflation has "collapsed" and no longer posed a "substantial problem" from the perspective of the economy, National Economy Minister Marton Nagy said. Hungary's headline CPI has fallen below levels in Estonia (5.0%) Croatia (4.8%), Austria (4.3%) and Slovakia (4.3%), he added. Falling inflation and rising wages could lift real wages by 6% or more in 2024, Mr Nagy said.

Analysts are mixed on the impact of the latest inflation data on MNB’s monetary policy. The current inflation level could open the door for steeper rate cuts, as the backward real interest remains the highest in the region. Citing these arguments, the government has called on the MNB to be more decisive in lowering interest rates to bring down borrowing costs to stimulate the economy, which is the top priority of the government.

The MNB could accelerate its easing cycle from 75bp rate cuts to 100bp, opined the chief, which could be helped if forint was stronger, Gabor Regos, chief analysts of Granit Alapkezelo.

Before the last rate-setting meeting in late January, the small spike in the EUR/HUF ahead of the EU summit spooked policymakers, who opted for a 75bp increase instead of the 100bp cut, below analysts’ estimates. The central bank’s tone remained hawkish, noting that cautious monetary policy was warranted given risks surrounding global disinflation and volatility in international investor sentiment.

The MNB may come under political and market pressure to step on the gas and increase the clip of rate cuts, which could ultimately weaken the forint further, triggering new inflationary risks. This may be a constraint on the central bank, according to Virovacz.

Analysts expect an upward shift in inflation in the second half of the year, as supply chain problems are posing upside risks.

Inflation may come below 4% in the first half and rise to 5% in the second part of the year and climb to 5.5-6% at the end of the year, according to ING's forecast.

Hungary’s average annual CPI rose to 17.6% in 2023, its highest level since 1995.