Consumer prices fell for the third straight month in Hungary last month, but remained well over the EU average at 24.0% (chart), down from 25.2% in March.

Core inflation also retreated from a 27-year high of 25.7% in March to 24.8%.

The relatively large decline was mainly due to the higher base. This is also reflected in the marginal decline of the monthly 0.7% growth, edging lower from 0.8% in March

Hungary has had by far the highest inflation in the European Union for months, in March it was three-fold the EU average due to multi-fold reasons. Pre-election procyclical fiscal policy and transfers increased money supply and bumped up consumer demand, which a year after the vote has all but collapsed. Companies hit by windfall taxes and extra levies passed on burdens to consumers, and the weak forint has pushed up imported inflation.

Food prices rose 37.9% in April, decelerating from a 42.6% increase in the previous month and 7pp lower than at their peak in December. On a monthly basis, food prices were flat. Energy prices increased by 41.8% y/y as the government overhauled the retail utility in the summer but fell 0.8% from the previous month.

Prices in the category that includes motor fuel rose only 0.5% (+22.7% y/y). Service prices were up 1.7% m/m (+9.8% y/y), the price of consumer durables stayed flat in April and rose 9.3% y/y. Tobacco and alcohol prices rose 1.1% m/m and 20.5% on an annual basis.

The latest inflation data is reassuring news for Hungary’s central bank (MNB), which has previously forecast the start of marked disinflationary trend in March as international financial market sentiment improved, energy prices have retreated from the peaks and consumer demand faltered and the forint strengthened.

 

 

Policymakers have forecast a steep decline in consumer prices in the second half, but the MNB’s annual forecast remained unchanged at 15.5-19%. The market consensus is closer to the upper threshold.

The Monetary Council reduced the top of its interest rate corridor, the overnight lending rate, by 450bp to 20.5% at the April policy meeting, marking the first cautious sign of monetary easing, and policymakers hinted the that a rate cut could be on the table at the next meeting

The question is whether the easing will start in May or in June, when the MNB releases its updated macroeconomic forecast.

Amundi expects the MNB to start monetary policy normalisation next month when the MNB may cut the O/N rate by 75-100bp and is set to continue rate cuts at the same clip, unless there is a negative surprise in the upcoming inflation data.  The brokerage expects negative real interest rates to turn positive, with annualised inflation falling below 10%, and the base rate being reduced to 11.5% by the end of 2022

Analyst expect the benchmark interest rate (O/N deposit) and the base rate to converge at the end of 2023.

The economic development ministry’s statement notes that government measures helped to reduce inflation in April. The government is dedicated to bringing inflation down and the introduction of price monitoring and mandatory discounts serve this goal, a short statement read.

From June, food stores with HUF1bn (€268mn) annual turnover have to discount a product of their choosing from each of 20 categories. A month later, an online price-monitoring platform will be launched that "aims to improve transparency, boost competition and prevent overpricing among food retailers".