Hungarian headline inflation slowed to an annual 7.9% (chart) in November from 9.9% in October, 0.2pp below analysts' forecasts, as disinflation in food and fuel continued, statistics office KSH said on December 8. On a monthly basis, prices were flat. Despite easing price pressure in the economy, the National Bank will likely maintain the pace of rate cuts seen in the previous two months.

The 2pp annualised slowdown in the headline data was driven by decelerating food and fuel prices. Although food prices surprisingly rose on a monthly basis (0.5%), the annual data showed a 7.1% growth, down from 10.4% in October and 15.4% in September. Food inflation peaked at over 44% in December, due to several factors, including the surging global energy and commodity prices, but local factors, such as VAT, and windfall taxes on retailers also weighed in.

Fuel prices fell by 3.6% on a monthly basis, which also significantly reduced inflation. Household energy prices fell 18.1%, albeit from a high base. Service prices increased by 12.6%, slowing from 13.2% in the previous month and consumer durable prices edged down 0.4% y/y.

Core inflation, which excludes volatile fuel and food prices, fell to single digits for the first time since March 2022, dropping to 9.1% from 10.9% in the previous month.

Although the current inflation data is still below the lower end of MNB’s forecast band in the September Inflation Report, this is unlikely to change the central bank in the pace of future monetary easing, ING Bank said in a note.

The MNB is expected to cut the base rate by another 75bp rate at the December 19 meeting, at the same pace as in November and October. The base rate has come down from 18% by 650bp since May, when the central bank began the easing cycle.

 

ING forecast inflation to fall to 6.1% in December, but the annual average rate will reach 17.7%, up from 14.5% in 2022, the highest level in 25 years. The MNB’s full-year forecast is 16.5-18.5% for the year to decelerate to 4.0–6.0%  in 2024, and between 2.5-3.5% in 2025.

ING projects inflation to average 5.1% in 2024 as a whole, but that remains considerably above the MNB’s 3% target. Inflation could bottom out at 4% in the first half, but creep up again in the second half of 2024 to around 6%, according to the bank's projections.

The forint weakened slightly after the release of the CPI data, but it remains range bound in the 376-382 range. With the steep fall in the consumer price index, the markets are expecting the interest premium of Hungarian assets to decrease with MNB further easing monetary conditions. The positive real interests however will lend support to the forint, analysts said. 

The decisions about interest rates should be taken applying a step-by-step, cautious and careful approach and not in ''autopilot" mode, MNB deputy Barnabas Virag said earlier.

This implies that the central bank will remain rather hawkish in fighting inflation, despite pressure from the government to accelerate the pace of rate cuts. The government fears that as long as borrowing costs remain high, this will constrain lending and economic growth, the main priority set by Prime Minister Viktor Orban for next year.

In related news, the EU's statistics agency said on Thursday it was in talks with the KSH over how energy inflation was calculated. Headline inflation fell to single digits in October for the first since April 2022, with a 9.9% reading that undershot market forecasts. After the release of the data, several economists have suggested that KSH underestimated energy inflation as the government lifted retail subsidies partially, but subsidised prices remained unchanged.

They argued that without a change in methodology last year, headline inflation would be at least 1pp higher than the official figures. KSH defended the reliability of the data, stating that it is transparent and complies with European standards. The data provision is subject to regular review by Eurostat. Commerzbank's analysts referred to the debate in a daily note to investors. The analyst said that it would have detrimental impacts if the credibility of the data is compromised due to government pressure.